Do Limit Orders Alter Inferences About Investor Performance and Behavior?
Juhani T. Linnainmaa
USC Marshall School of Business; National Bureau of Economic Research (NBER)
October 7, 2009
AFA 2004 San Diego Meetings
Journal of Finance, Forthcoming
Individual investors lose money around earnings announcements, experience poor post-trade returns, exhibit the disposition effect, and make contrarian trades. Using simulations and trading records of all individuals in Finland, I find that investors’ use of limit orders is largely responsible for these trading patterns. These patterns arise mechanically because limit orders are price-contingent and face the adverse selection problem. Reverse causality from behavioral biases to order choices does not appear to explain my findings. I propose a simple method for measuring a data set’s susceptibility to this limit order effect.
Number of Pages in PDF File: 62
Keywords: investor behavior, individual investors, limit order effect
JEL Classification: G11
Date posted: December 8, 2003 ; Last revised: February 8, 2010