Corporate transparency and the disposition effect

2026-05-08

AI Summary

This study investigates how corporate transparency influences the disposition effect among individual investors—the behavioral bias characterized by prematurely selling winning stocks while holding onto losing positions. Leveraging a comprehensive measure of firm-level transparency and granular investor trading data, the authors employ empirical regression analyses to systematically uncover a dual moderating role of transparency: enhanced transparency significantly attenuates the disposition effect, with a stronger impact on reducing premature sales of profitable stocks than on adjusting the holding of loss-making positions. The findings underscore the critical role of corporate disclosure practices in mitigating investor behavioral biases and improving decision-making quality in financial markets.

Abstract

The disposition effect describes investors' irrational behavior of selling profitable assets too soon while holding onto losing assets for too long. This study examines the impact of transparency at the firm level on the disposition effect of individual investors who hold that company's stock. Our results show that an increase in corporate transparency significantly reduces the disposition effect. Further analysis reveals that for companies with greater transparency, when the held stock is profitable, investors' confidence in holding it increases, leading to a reduced bias toward selling profitable stocks. When the stock is held at a loss, investors' confidence in holding it weakens, but they often perceive the loss as temporary and maintain confidence in the company's long-term prospects, thus exacerbating the bias toward holding losing stocks. The effect of increased transparency on the selling behavior of profitable stocks is greater than its effect on the selling behavior of losing stocks. Overall, an increase in corporate transparency significantly reduces the disposition effect.

Problem

• corporate transparency
• disposition effect
• individual investors
• investment behavior
• behavioral finance

Innovation

• corporate transparency
• disposition effect
• investor behavior
• behavioral finance
• information asymmetry