Market-Wide Impact of the Disposition Effect: Evidence from Ipo Trading Volume

Posted: 3 Dec 2003 Last revised: 2 Mar 2008

Abstract

I study empirically the market-wide importance of investors' reluctance to realize losses by investigating IPO trading volume. In IPOs all initial investors have a common purchase price, and the disposition effect should thus be at its strongest. Turnover is significantly lower for negative initial return IPOs when the stock trades below the offer price, and increases significantly on the day the price surpasses the offer price for the first time. The increase in volume lasts for two weeks. On a daily level, attaining new maximum and minimum stock prices also produces strong increase in volume. These results suggest that reference price effects play a role in aggregate stock market activity.

Keywords: IPO, Loss aversion, Disposition effect, Trading volume

JEL Classification: G10, G30

Suggested Citation

Kaustia, Markku, Market-Wide Impact of the Disposition Effect: Evidence from Ipo Trading Volume. Journal of Financial Markets, Vol. 7, No. 2, pp. 207-235, 2004, Available at SSRN: https://ssrn.com/abstract=459260

Markku Kaustia (Contact Author)

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

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