Paper: arXiv 2605.07352

Authors: Siliu Chen, Fei Ren

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.

Complexity vs Empirical Score

  • Math Complexity: 2.5/10
  • Empirical Rigor: 6.5/10
  • Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper presents an interesting empirical bridge between corporate governance (transparency) and behavioral finance (disposition effect). While the mathematical modeling is minimal and relies primarily on standard econometric regressions, the empirical insights regarding asymmetric investor confidence are novel and well-motivated.

Research Flowchart

  flowchart TD
    A["Research Goal:<br>Impact of Corporate Transparency<br>on Investor Disposition Effect"] --> B["Data & Inputs:<br>Individual Investor Transactions<br>& Firm Transparency Metrics"]
    B --> C["Methodology:<br>Empirical Analysis of<br>Selling Behavior (Gains vs. Losses)"]
    C --> D["Mechanisms Uncovered"]
    
    D -->|"Gain Position"| E["Increased Investor Confidence:<br>Reduces urge to sell winners early<br><i>(Stronger Effect)</i>"]
    D -->|"Loss Position"| F["Perceived Temporary Loss:<br>Slightly increases hold of losers<br><i>(Weaker Effect)</i>"]
    
    E --> G["Final Outcome:<br>Overall Corporate Transparency<br>Significantly REDUCES Disposition Effect"]
    F --> G