Do Individual Investors Ignore Transaction Costs?

Abstract

Using close to 800,000 transactions by 66,000 households in the United States and close to 2,000,000 transactions by 303,000 households in Finland, this paper shows that, on average, individual investors with longer holding periods choose to hold less liquid stocks in their portfolios. The relationship between holding periods and transaction costs is stronger among more financially sophisticated households. We confirm our findings by analyzing changes in investors’ holding periods around exogenous shocks to stock liquidity. Our findings challenge the notion that individual investors ignore non-salient costs when making investment decisions and suggest that they are cognizant of cost of trading stocks.

Keywords: individual investors; liquidity; transaction costs; investor attention; behavioral bias

JEL Classification: D82, D9, G4, G11, G12, G14, G32, G33, L14