The Disposition Effect: A Longitudinal Study for Private and Institutional Investors in the Belgian Market in Different Market Circumstances

Abstract

Evidence of the disposition effect, selling winning stocks too early and keeping losing stocks too long, has been found for all type of investors, from pure private investors (Odean, 1998), to those receiving investment advice (Shapira & Venezia, 2001), institutional investors (Grinblatt & Keloharju, 2001), mutual funds (Cici, 2012) and professional traders (Locke & Mann, 2005). Most of these studies, however, have been done for short data periods, on different datasets and in markets where capital gains taxes are causing tax-induced selling. This study will examine the disposition effect on a long dataset (2001 until 2014) in Belgium, a country where all capital gains are tax-free and capital losses not tax deductible. The disposition effect will be compared among four different investor categories: private individuals not receiving professional investment advice, those who do receive advice, private individuals under discretionary management and institutional investors. Furthermore will be tested whether small private investors show the same disposition effect as large private investors, whether the disposition effect is the same for stocks with the smallest market capitalizations and the largest ones. Finally, the disposition effect of the four investor types will be compared in bull and bear markets separately. This study will contribute to the existing literature for several reasons, namely (a) the database is over a very long period with real transactional data instead of merely holding data (Frazzini, 2006; Hur et al., 2010; Cici, 2012); (b) only one other study so far (Firth, 2015) has studied the disposition effect in a tax neutral environment but only for private individuals; (c) the disposition effect will be tested before and after dividends; (d) 4 different investor categories in the same country will be studied at the same time: private individuals without investment advice, private individuals under discretionary management, private individuals with investment advice and institutional investors (mostly mutual funds); (e) the investor group private individuals under discretionary management has so far never been studied as a separate group.