Corporate transparency and the disposition effect

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.