The Reach of the Disposition Effect: Large Sample Evidence Across Investor Classes

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Abstract
We examine detailed daily Australian Stock Exchange share registry data for investors in IPO and index stocks between 1995 and 2000 and find that the "disposition effect", investors' reluctance to crystallise losses and relative eagerness to realise gains, is pervasive across investor classes, however, traders instigating larger investments tend to be less, if not entirely unaffected by the disposition bias. Our novel findings include (a) that the disposition effect ameliorates over time, being undetectable in our tests from around 200 trading days after purchase, (b) the "house money" effect tempers the disposition effect, (c) shareholder loyalty schemes also partially off-set investors' relative preference for selling winning stocks, and (d) the reversal of the disposition effect in June (the last month of the fiscal year) does not occur among investors unable to take advantage of tax shields. In line with earlier research, our results support a tax related explanation for the June effect rather than window dressing or momentum effect explanations. Finally, our tests confirm Odean?s (1998) finding that the disposition effect is not driven by diversification motives, or to avoid higher transaction costs associated with lower priced stocks.

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