Award at the 2005 European Finance Association Meeting, to the retail broker and discount

We study the trading of individual investors using transaction data and identifying buyeror seller-initiated trades. We document four results: (1) Small trade order imbalance correlates well with order imbalance based on trades from retail brokers. (2) Individual investors herd. (3) When measured annually, small trade order imbalance forecasts future returns; stocks heavily bought underperform stocks heavily sold by 4.4 percentage points the following year. (4) Over a weekly horizon small trade order imbalance reliably predicts returns, but in the opposite direction; stocks heavily bought one week earn strong returns the subsequent week, while stocks heavily sold earn poor returns.

We thank an anonymous discount broker for providing data on individual investors ’ trades and Terry Odean for his help in obtaining and understanding the data set. Ivković and Weisbenner acknowledge the financial

We study stock holdings and trading behavior of more than 60,000 households and find evidence consistent with dividend clienteles. Retail investor stock holdings indicate a preference for dividend yield that increases with age and decreases with income, consistent with age and tax clienteles, respectively. Trading patterns reinforce this evidence: Older, low-income investors disproportionally purchase stocks before the exdividend day. Furthermore, among small stocks, the ex-day price drop decreases with age and increases with income, consistent with clientele effects. Finally, consistent with the behavioral “attention ” hypothesis, we document that older and low-income investors purchase stocks following dividend announcements. MORE THAN 40 YEARS AGO Miller and Modigliani (1961) argued that dividend clienteles could form based on investor characteristics. According to their hypothesis, firms that pay lower (higher) dividends attract investors who dislike (like) dividend income, and this creates the potential for an optimal match between the dividend policy of a firm and the dividend preferences of its stockholders.

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This study investigates whether personal taxes are related to asset valuations. The effective tax rate of investment income fluctuated considerably since federal income taxes were introduced. The main result of the paper demonstrates that there is an economically and statistically significant relationship between asset valuations and personal tax rates. Stock valuations tend to be higher when taxes are low and lower when taxes are high. This result is consistent with the observation that stock and bond returns tend to be higher in periods when taxes decrease and lower when taxes increase. JEL Classification: G12, H20, E44

A substantial literature in institutional herding examines reasons for and evidence of correlated trading across institutional investors, but little has been written about the extent to which individual investor trading is correlated or why. We document that the trading of individuals is highly correlated and surprisingly persistent. We discuss why this correlation is unlikely to stem from the same motivations as institutional herding. Correlated trading by individual is a necessary condition for the trading biases of individual investors to affect asset prices, since the trades of any particular individual are likely to be small. The preferences for buying some stocks while selling others must be shared by many individual investors if these preferences are to affect prices. We analyze trading records for 66,465 households at a large national discount broker between January 1991 and November 1996 and 665,533 investors at a large retail broker between January 1997 and June 1999. Using a variety of empirical approaches, we document that the trading of individuals is more coordinated than one would expect by mere chance. For example, if individual investors are net buyers of a stock this month, they are likely

Using data on stock purchases made by individual investors through a retail discount broker from 1991 to 1996, we present novel empirical evidence regarding the nature and extent of the disposition effect. We find strong evidence for a disposition effect based on stock performance relative to a market index. In addition, we find that receiving dividends since stock purchase decreases the propensity to sell. Further decreases in the propensity to sell are related to dividend initiations and the receipt of a dividend during the previous month. Once we control for these other factors, higher absolute returns are associated with lower probabilities of sale. The Disposition Effect and Households ’ Stock Trades:

We use a large database, containing nearly 100,000 large individual stock purchases, to study the factors that affect the realization of capital gains and losses. These factors include the holding period, the calendar month, and the accrued gain or loss since the time of purchase. A particularly appealing feature of the data set is the ability to compare investors ’ realizations in their taxable and tax-deferred accounts. We reach four conclusions. First, for large stock purchases, we find a strong lock-in effect for capital gains in taxable accounts after the stock has been held for a few months. Second, we find evidence of trading behavior that is consistent with year-end tax-loss selling. In taxable accounts in December, and especially in the last week of December, investors are more likely to sell losers than winners. The pattern for other months is the reverse. The December selling effect is particularly strong for stocks that qualify for short-term loss treatment. We find that tax-loss selling is greater for investors who have realized gains during the year and the when the overall market has risen during the about-to-end calendar year. The demand for loss offsets is likely to be high in these settings. Third, we find evidence that wash sale rules affect trading decisions in December, but we do not find similar

Abstract not found