887 Words4 Pages

Consider one of the most influential theories in behavioral finance, Prospect Theory, which is developed by Daniel Kahneman and Amos Tversky with their published paper in 1979, investors value gains and losses differently. Losses have more emotional impact to investors than an equivalent amount of gains. Prospect theory states that people are risk-averse in the domain of gains and risk-seeking in the domain of losses; according to a more specific behavior pattern (fourfold pattern of risk, Tversky & Kahneman, 1992), people are risk-averse for gains with high probability but risk-seeking for gains with low probability, while people are risk-seeking for losses with high probability but risk-averse for losses with low probability (Tversky & Kahneman,*…show more content…*

The theories above indicate that investors are not willing to realize losses, in other words, investors are not willing to sell their asset at a loss. Shefrin & Statman (1985) firstly present an investor behavioral pattern named Disposition effect, which is the behavior of investors to hold on to losing stocks for too long while sell winning stocks too early. From then on, many empirical literatures have documented the disposition effect among different kinds of investors. Heisler (1994), Locke & Mann (2000) studies futures traders; Odean (1998), Shapira & Venezia (2001) and Grinblatt & Keloharju (2001) studies individual stock market investors; Genesove & Mayer (2001) studies individual home owners; as well as Kaustia (2004) studies initial public offerings*…show more content…*

Additionally, trading volume should increase when the price of an IPO with a negative initial return exceeds the offer price for the first time. Kaustia (2004) finds support for the aggregate impact from the disposition effect on the subsample of negative initial return IPOs. Kaustia (2004) states that trading volume is clearly suppressed below the offer price for negative initial return IPOs, and turnover increases significantly at the time the stock price exceeds the offer price for the first time and continues to get higher while the stock is trading above the offer price. In this paper I inspect IPO trading volume and have some different findings that trading volume is significantly suppressed below the offer price for IPOs in 2003-2007 which is defined as the before-crisis period in Section 2 of this paper, and the effect does not continue to be significant during the following weeks since the offer. In addition, this paper also finds that trading volume is not significantly suppressed below the offer price for IPOs in the after-crisis period (details of period definition are discussed in Section 2). In this paper I also find that there is no significant difference in trading volume between before-crisis and after-crisis

The theories above indicate that investors are not willing to realize losses, in other words, investors are not willing to sell their asset at a loss. Shefrin & Statman (1985) firstly present an investor behavioral pattern named Disposition effect, which is the behavior of investors to hold on to losing stocks for too long while sell winning stocks too early. From then on, many empirical literatures have documented the disposition effect among different kinds of investors. Heisler (1994), Locke & Mann (2000) studies futures traders; Odean (1998), Shapira & Venezia (2001) and Grinblatt & Keloharju (2001) studies individual stock market investors; Genesove & Mayer (2001) studies individual home owners; as well as Kaustia (2004) studies initial public offerings

Additionally, trading volume should increase when the price of an IPO with a negative initial return exceeds the offer price for the first time. Kaustia (2004) finds support for the aggregate impact from the disposition effect on the subsample of negative initial return IPOs. Kaustia (2004) states that trading volume is clearly suppressed below the offer price for negative initial return IPOs, and turnover increases significantly at the time the stock price exceeds the offer price for the first time and continues to get higher while the stock is trading above the offer price. In this paper I inspect IPO trading volume and have some different findings that trading volume is significantly suppressed below the offer price for IPOs in 2003-2007 which is defined as the before-crisis period in Section 2 of this paper, and the effect does not continue to be significant during the following weeks since the offer. In addition, this paper also finds that trading volume is not significantly suppressed below the offer price for IPOs in the after-crisis period (details of period definition are discussed in Section 2). In this paper I also find that there is no significant difference in trading volume between before-crisis and after-crisis

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