The Disposition Effect Demonstrated on IPO Trading Volume

Abstract

The disposition effect is known as the reluctance of investors to realize losses and their eagerness to realize gains. The aim of the present research was to examine the impact of the disposition effect at the aggregate (market) level. In order to limit the number of factors affecting the selling decision on the share exchange, the examination was done on Initial Public Offerings. The main factor determining the volume of turnover on the first trading day should be the initial rate of return. Our research shows that a higher turnover volume is associated with a positive initial rate of return and a lower turnover volume associated with a negative initial rate of return. This phenomenon can be explained by the disposition effect.

We conduct our research on the emerging market in Poland. The Warsaw Stock Exchange has been recently the second largest IPO market in Europe, after London.

Keywords: disposition effect, behavioural finance, Initial Public Offering (IPO)

JEL Classification: G11, G20