Do Limit Orders Alter Inferences About Investor Performance and Behavior?

62 Pages Posted: 8 Dec 2003 Last revised: 8 Feb 2010

See all articles by Juhani T. Linnainmaa

Juhani T. Linnainmaa

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Date Written: October 7, 2009

Abstract

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.

Keywords: investor behavior, individual investors, limit order effect

JEL Classification: G11

Suggested Citation

Linnainmaa, Juhani T., Do Limit Orders Alter Inferences About Investor Performance and Behavior? (October 7, 2009). AFA 2004 San Diego Meetings, Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=474222 or http://dx.doi.org/10.2139/ssrn.474222

Juhani T. Linnainmaa (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

HOME PAGE: http://www.tuck.dartmouth.edu/faculty/faculty-directory/juhani-linnainmaa

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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