A study of prominence for disposition effect: a systematic review

2019 ◽  
Vol 11 (1) ◽  
pp. 2-21 ◽  
Author(s):  
Syed Aliya Zahera ◽  
Rohit Bansal
Keyword(s):  
Mutual Funds ◽  
Behavioral Finance ◽  
Mutual Fund ◽  
Institutional Investors ◽  
Disposition Effect ◽  
Individual Investors ◽  
Content Type ◽  
Experimental Market ◽  
The Individual ◽  
The Impact

Purpose The purpose of this paper is to study the disposition effect that is exhibited by the investors through the review of research articles in the area of behavioral finance. When the investors are hesitant to realize the losses and quick to realize the gains, this phenomenon is known as the disposition effect. This paper explains various theories, which have been evolved over the years that has explained the phenomenon of disposition effect. It includes the behavior of individual investors, institutional investors and mutual fund managers. Design/methodology/approach The authors have used the existing literatures from the various authors, who have studied the disposition effect in either real market or the experimental market. This paper includes literature over a period of 40 years, that is, Dyl, 1977, in the form of tax loss selling, to the most recent paper, Surya et al. (2017). Some authors have used the PGR-PLR ratio for calculating the disposition effect in their study. However, some authors have used t-test, ANNOVA, Correlation coefficient, Standard deviation, Regression, etc., as a tool to find the presence of disposition effect. Findings The effect of disposition can be changed for different types of individual investors, institutional investors and mutual funds. The individual investors are largely prone to the disposition effect and the demographic variables like age, gender, experience, investor sophistication also impact the occurrence of the disposition effect. On the other side, the institutional investors and mutual funds managers may or may not be affected by the disposition effect. Practical implications The skilled understanding of the disposition effect will help the investors, financial institutions and policy-makers to reduce the adverse effect of this bias in the stock market. This paper contributes a detailed explanation of disposition effect and its impacts on the investors. The study of disposition effect has been found to be insufficient in the context of Indian capital market. Social implications The investors and society at large can gains insights about causes and influences of disposition effect which will be helpful to create sound investment decisions. Originality/value This paper has complied the 11 causes for the occurrence of disposition effect that are found by the different authors. The paper also highlights the impact of the disposition effect in the decision-making of various investors.

Does institutional ownership affect firms' international investments? empirical evidence from India

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Manogna R L ◽  
Aswini Kumar Mishra ◽  
Abhishek Kumar Sinha
Keyword(s):  
Mutual Funds ◽  
Mutual Fund ◽  
Institutional Investors ◽  
Risk Perceptions ◽  
Emerging Economy ◽  
Strategic Decision ◽  
Foreign Investments ◽  
International Investments ◽  
Content Type ◽  
Lending Institutions

PurposeThe preference of firm internationalization is shaped by different groups of owners and the institutional environment in which the firm operates. Past studies have largely ignored the heterogeneity among the controlling groups in influencing the internationalization decision in emerging economy firms.Design/methodology/approachIn this study, the authors draw understanding from behavioral risk perspective and institutional theory to inspect the risk perceptions and propensities of various ownership groups such as lending institutions, domestic mutual funds and foreign institutional investors (FIIs). Empirical analysis was conducted from a sample of 2695 unique BSE-listed nonfinancial Indian firms during 2005−2019 period using Tobit panel regression analysis.FindingsThe findings reveal that firms' international investments are impacted differently by ownership share of different types of institutional investors after controlling for firm-level resources and capabilities. While lending institutions and FIIs are supportive of foreign investments by firms, domestic mutual funds are not supportive of this strategic decision on foreign investment.Research limitations/implicationsFurther, our results show that family ownership, measured in terms of family shareholding, negatively moderates the lending institutions toward internationalization and does not impact the FIIs and mutual fund investor's decision regarding the foreign investments.Originality/valueTo the best of the author's knowledge, the current paper is the first to address the risk perceptions of various ownership groups on firm's international outlook in an emerging economy context with the latest data. This practical perspective helps the organizations in managing the ownership holdings.

scholarly journals The impact of country-level and fund-level factors on mutual fund performance in Vietnam

2019 ◽  
Vol 21 (1) ◽  
pp. 42-56
Author(s):  
Hoa Thi Nguyen ◽  
Dung Thi Nguyet Nguyen
Keyword(s):  
Mutual Funds ◽  
Mutual Fund ◽  
Investment Decision ◽  
Political Stability ◽  
Fund Performance ◽  
Data Set ◽  
Policy Makers ◽  
Content Type ◽  
Country Level ◽  
The Impact

Purpose The purpose of this paper is to examine the determinants of mutual funds’ performance at both a country level and a fund level in Vietnam. Design/methodology/approach The different types of funds with more than three-year operation are selected to remove outliers of the stock market boom from 2015 to 2018. The data set includes 54 mutual funds operating during the period from 2008 until November 2018. Findings The research finds that there is a positive relationship between macroeconomics and mutual funds’ performance. Furthermore, country-level governance such as regulation effectiveness, political stability, economic growth and financial development has a positive correlation with mutual funds’ performance. However, the impact of fund-level factors is diverse with the no significant impact of board size on mutual fund’s performance, while passive funds perform better than active funds in Vietnam. Practical implications The research results suggest that investors should pay attention to the types of funds and operating expense when making an investment decision in mutual funds. There are some recommendations for both government policy-makers and the mutual fund industry that are likely to facilitate the development of this field in Vietnam. Originality/value The research contributes to the understanding of what are the factors that should be considered when investing in mutual funds.

Developing an instrument for measuring the effects of heuristics on investment decisions

Kybernetes ◽  
2016 ◽  
Vol 45 (7) ◽  
pp. 1052-1071 ◽  
Author(s):  
Kadir C. Yalcin ◽  
Ekrem Tatoglu ◽  
Selim Zaim
Keyword(s):  
Behavioral Finance ◽  
Investment Decisions ◽  
Small Sample ◽  
Equation Modeling ◽  
Individual Investors ◽  
Moderating Effects ◽  
Measurement Scales ◽  
Content Type ◽  
The Usa ◽  
The Impact

Purpose Based on a thorough review and synthesis of the literature in behavioral finance, the purpose of this paper is to develop three measures of heuristics that tend to influence investment decisions of individual investors. Design/methodology/approach Using perceptual data collected from a sample of 167 individual investors in the USA, the reliability and validity of heuristics measures are assessed by confirmatory factor analysis with structural equation modeling. Then, the second-order model is executed in order to indicate the paths among the study’s constructs. Finally, a multiple-group analysis is conducted to analyze the moderating effects of demographic factors on the relationship between the perceived level of heuristics and their constituent dimensions. Findings Of the three groups of heuristics, salience is found to be the most important followed by mental accounting, while representativeness features as relatively less important. Regarding the moderating effects, only investment experience is noted to have a significant moderating impact. Research limitations/implications The data utilized for testing and validating this instrument was acquired from a relatively small sample of individual investors in the USA, which makes the generalization of findings somewhat limited. Practical implications Both researchers and practitioners in behavioral finance can use these measurement scales to better understand the impact of heuristics on individual investment decisions and also to develop models that relate the critical factors of heuristics to the performance of individual investment decisions. Originality/value To date, there has been no systematic attempt in the extant behavioral finance literature to develop a valid and reliable instrument on heuristics which would aid to improve the quality of decision making in investment analysis.

Antecedents to heuristics: decoding the role of herding and prospect theory for Indian millennial investors

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Preeti Goyal ◽  
Poornima Gupta ◽  
Vanita Yadav
Keyword(s):  
Prospect Theory ◽  
Mutual Funds ◽  
Mutual Fund ◽  
Future Research ◽  
Content Type ◽  
Financial Investment ◽  
Financial Products ◽  
Financial Planners ◽  
The Impact

PurposeThe purpose of this paper is to explore how heuristics are formed and whether herding and prospect theory act as antecedents to heuristics. The relationship is explored specifically for millennials.Design/methodology/approachThe proposed relationship is explored specifically for millennials. Herding and prospect theory are modelled as antecedents to heuristics. The study uses survey data from 923 millennials from India to test the model for two financial products: equity and mutual funds. Regression analysis is used to evaluate the model.FindingsFindings support the role of herding and prospect theory as antecedents to heuristics of millennials although to varying degrees for equity and mutual fund investments. The impact of herding on heuristics is likely to be smaller for equity investments as compared to mutual fund investments.Research limitations/implicationsThe findings provide insights into how heuristics are formed for millennials. The findings add to literature by beginning a new line of inquiry on how heuristics are formed. Since the model is tested on a single generation, future research can test the model on other generations. In addition, future research can also add more antecedents to our proposed model.Practical implicationsFindings from this study can provide financial planners and marketers with an understanding of how heuristics are formed for millennials. Financial planners can use these insights while providing financial advice to this generation and marketers can use them to create more relevant outreach.Social implicationsFinancial investments are an important conduit for financial security. By understanding the cognitive processes that influence financial investment decision-making, it is possible for educators to create content appropriately and for financial planners to advise clients accordingly to enable optimal financial decisions that will be wealth-creating.Originality/valueExisting literature primarily treats heuristics, herding and prospect theory as being independent of each other. The authors take a novel approach to model the antecedents to heuristics to be herding and prospect theory. The model is tested on millennials for two financial products: equity and mutual funds.

Individual investor attention to stock split and the disposition effect

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Wendy Kesuma ◽  
Irwan Adi Ekaputra ◽  
Dony Abdul Chalid
Keyword(s):  
Stock Returns ◽  
Private Information ◽  
Stock Exchange ◽  
Stock Splits ◽  
Disposition Effect ◽  
Individual Investors ◽  
Investor Attention ◽  
Content Type ◽  
Stock Split ◽  
The Impact

PurposeThis paper investigates whether individual investors are attentive to stock splits and whether higher split ratios (stronger private information signals) reduce the disposition effect.Design/methodology/approachThis study employs stock split events and transaction data in the Indonesia Stock Exchange (IDX) from January 2004 to December 2017. The authors measure individual investors' attention using buy-initiated trades. To test the effect of split signal on disposition effect, the authors regress individual investors' sell-initiated trades on past stock returns.FindingsUnlike Birru (2015), the authors find that individual investors are attentive to stock splits, especially when stock split ratios are high. In turn, stock splits tend to weaken the disposition effect. The higher the stock split ratios, the weaker the disposition effect.Research limitations/implicationsThis study has a limitation in that the authors exclude all stock splits with dividend events around the split date. These stock splits cover 37% of all splits in Indonesia.Practical implicationsPractically, individual investors should look for stock-related information to reduce disposition bias.Originality/valueTo the best of authors’ knowledge, this study is the first to test individual investors' attention on stock splits based on their buy-initiated trades. This study is also the first to test the impact of stock split ratios on the disposition effect reduction. This study's findings enrich the scant literature on individual investors' attention and how to reduce their disposition effect bias.

Do behavioral biases differ among institutional and individual investors?

2021 ◽  
pp. 61-73
Author(s):  
Roshani Chamalka Gunathilaka ◽  
◽  
J. M. Ruwani Fernando ◽  
Keyword(s):  
Decision Making ◽  
Institutional Investors ◽  
Emerging Market ◽  
Investment Decisions ◽  
Equation Modeling ◽  
Disposition Effect ◽  
Individual Investors ◽  
Behavioral Biases ◽  
The Individual ◽  
Overconfidence Bias

Purpose: The purpose of this paper is to investigate how does the behavioral biases differ among the individual and institutional investors based on Colombo Stock Exchange. The study considers the effect of four behavioral biases; overconfidence bias, representativeness bias, disposition effect and herd mentality bias on the financial investment decision making of individual investors and institutional investors. Design / methodology / approach: A questionnaire was utilized to collect the data and the final sample consisted with 104 individual and 71 institutional respondents. The data of 175 investors was analyzed by using Partial Least Square-Structural Equation Modeling approach. Findings: The study revealed that disposition effect make an impact on the investment decisions of both individual investors and institutional investors whereas overconfidence bias has impact only on the individual investors’ investment decisions. Originality: This study is one of the pioneering studies examining the behavioral biases differences of individual and institutional investors’ decision making. Thus, this study expands the existing literature in the field of behavioral finance particularly in emerging market context. In this sense, the findings of this study could draw important inferences for researchers, investors and policy makers to ensure that they make rational investments decisions.

Examining investors' sentiments, behavioral biases and investment decisions during COVID-19 in the emerging stock market: a case of Pakistan stock market

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Shagufta Parveen ◽  
Zoya Wajid Satti ◽  
Qazi Abdul Subhan ◽  
Nishat Riaz ◽  
Samreen Fahim Baber ◽  
...  
Keyword(s):  
Developing Countries ◽  
Stock Market ◽  
Behavioral Finance ◽  
Stock Markets ◽  
Investment Decisions ◽  
Equation Modeling ◽  
Disposition Effect ◽  
Content Type ◽  
Behavioral Biases ◽  
The Impact

PurposeThis study investigates the impact of the COVID-19 pandemic on investors' sentiments, behavioral biases and investment decisions in the Pakistan Stock Exchange (PSX).Design/methodology/approachThe authors have assessed investors' behaviors and sentiments and the stock market overreaction during COVID-19 using a questionnaire and collected data from 401 investors trading in the PSX.FindingsResults of structural equation modeling revealed that the COVID-19 pandemic affected investors' behaviors, investment decisions and trade volume. It created feelings of fear and uncertainty among market participants. Evidence suggests that behavioral heuristics and biases, including representative heuristic, anchoring heuristic, overconfidence bias and disposition effect, negatively influenced investors' decisions at the PSX.Research limitations/implicationsThis study will contribute to behavioral finance literature in the context of developing countries as it has revealed the impact of COVID-19 on the emerging stock market, and its results are generalizable to other emerging stock markets.Practical implicationsThe findings of this study will help academicians, researchers and policymakers of developing countries. Academicians can formulate new behavioral models that can depict the solutions of dealing with an uncertain situation like COVID-19. Policymakers like the Securities Exchange Commission and the PSX can formulate crisis management strategies based on behavioral finance concepts to cope with situations like COVID-19 in the future and help lessen investors' losses in the stock markets. The role of the Securities Exchange Commission is crucial as it regulates the financial markets. It can arrange workshops to educate investors to manage their decisions during crisis time and focus on the best use of irrational and rational decision-making at the same time using Lo (2004) adaptive market hypothesis.Originality/valueThe novelty of the paper is that the authors have introduced overconfidence and disposition effect as mediators that create a connection between representative and anchoring heuristics and investment decisions using primary data collected from investors (institutional and retail) to demonstrate the presence of psychological biases during COVID-19, and it has been done for the first time according to authors' knowledge. It is a contribution and addition to the behavioral finance literature in the context of developing countries' stock markets and their efficiency.

scholarly journals Investor confidence and mutual fund performance in emerging markets

2018 ◽  
Vol 45 (6) ◽  
pp. 1288-1310 ◽  
Author(s):  
Ann-Ngoc Nguyen ◽  
Muhammad Sadiq Shahid ◽  
David Kernohan
Keyword(s):  
Emerging Markets ◽  
Mutual Funds ◽  
Mutual Fund ◽  
Unobserved Heterogeneity ◽  
Generalized Method Of Moments ◽  
Fund Performance ◽  
Mutual Fund Performance ◽  
Content Type ◽  
Investor Confidence ◽  
The Impact

Purpose The purpose of this paper is to investigate the impact of investor confidence on mutual fund performance in two relatively vulnerable but leading emerging markets, India and Pakistan. Design/methodology/approach A pooled ordinary least squared (OLS) model is used to look at two alternative measures of investor confidence and test for the relationship between investor confidence and mutual fund returns. To check the robustness of the findings, the authors also implement two-stage least squares and generalized method of moments techniques to control for unobserved heterogeneity, simultaneity and dynamic endogeneity problems in the regressors. Findings The paper finds that the returns of mutual funds are positively associated with investor confidence and an interaction effect exists between investor confidence and persistence in performance. The paper also confirms that returns from mutual funds are associated with different fund characteristics such as fund size, turnover, expense, liquidity, performance persistence and the fund’s age. These findings remain robust to alternative model specifications and measures of investor confidence. Originality/value While the previous literature mainly focuses on mutual fund characteristics and the macroeconomic determinants of mutual fund returns, this paper demonstrates that investor confidence plays an important role in determining mutual fund performance. The authors attribute this finding to two relatively unique features of the emerging markets in the study. A lack of awareness of mutual funds as being a low-cost investment vehicle and the interplay of cultural and behavioral changes have prevented investor’s savings from being channeled into investment products, away from gold or property.

An investigation of the impact of financial literacy, risk attitude, and saving motives on the attenuation of mutual fund investors’ disposition bias

2017 ◽  
Vol 43 (3) ◽  
pp. 282-298 ◽  
Author(s):  
Sara Jonsson ◽  
Inga-Lill Söderberg ◽  
Mats Wilhelmsson
Keyword(s):  
Interest Rates ◽  
Mutual Fund ◽  
Financial Literacy ◽  
Risk Attitude ◽  
Individual Characteristics ◽  
Disposition Effect ◽  
Content Type ◽  
Fine Grained ◽  
Separate Model ◽  
The Impact

Purpose The purpose of this paper is to investigate the impact of financial literacy, risk attitude, and saving motives on the attenuation of mutual fund investors’ disposition bias. Specifically, the authors focus on individual characteristics explaining the investors’ propensity to sell shares in a poorly performing mutual fund. Design/methodology/approach The study relies on survey data collected from 1,564 Swedish households in 2013. The authors test the hypotheses considering three different portfolio compositions and portfolio performances. Each composition corresponds to a dependent variable and a separate model which are estimated using ordinal logistic regression. Findings The authors find that different forms of financial literacy affect attenuation of the disposition effect. Specifically, the authors find that knowledge about mutual funds and knowledge about current market conditions affect the attenuation of the disposition effect, whereas the authors find no support for the effect of “technical financial knowledge” (e.g. the ability to calculate compound interest rates). The authors also find no support for the effects of risk attitude and saving motives on the attenuation of the disposition bias. Originality/value The findings suggest a need for a more fine-grained conceptualization of the financial literacy concept and its effect on investors’ disposition bias. Since an important implication of the findings is that financial literacy could potentially help people overcome behavioral bias, the study provides insights for policymakers as well as into the discussion on the design of consumer education programs.

Impact of competition on fund disclosures and consumer search costs

2019 ◽  
Vol 18 (2) ◽  
pp. 198-220
Author(s):  
Sitikantha Parida
Keyword(s):  
Mutual Funds ◽  
Mutual Fund ◽  
Market Competition ◽  
Search Costs ◽  
Consumer Search ◽  
Relative Performance ◽  
Policy Implications ◽  
Content Type ◽  
The Impact ◽  
Illiquid Assets

Purpose The purpose of this paper is to investigate the impact of competition in financial markets on the frequency of portfolio disclosures by mutual funds and its implications for consumer search costs. Design/methodology/approach The empirical analysis merges the Center for Research in Security Prices (CRSP) survivorship bias-free mutual fund database, the Thompson Financial CDA/ Spectrum holdings database and the CRSP stock price data. The sample covers the time period between 1993 and 2010 and OLS and logistic regressions are used to investigate the impact of competition on fund disclosures. Findings This paper finds that mutual fund disclosures decrease with market competition and this effect is amplified for funds holding illiquid assets. These results provide empirical support for the findings of Carlin et al. (2102). Mutual funds use portfolio disclosures as a marketing tool to attract investments in a tournament-like market, where superior relative performance and greater visibility are rewarded with convex payoffs. With competition, the likelihood of receiving new investments decreases for each fund and funds respond by reducing costly voluntary disclosures. The disclosure costs are higher for funds holding illiquid assets, and hence, the effect is stronger for them. Originality/value This paper has important policy implications for disclosures in a market where relative performance matters. The traditional view is that competition induces voluntary disclosure because entities would like to differentiate themselves from competitors, and hence, competition should increase market transparency. However, this paper sheds light on the negative consequence of competition in a tournament-like mutual fund market.

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