💰 quantitative finance

Corporate transparency and the disposition effect

This study demonstrates that increased corporate transparency significantly reduces the disposition effect by boosting investor confidence in profitable stocks and fostering a belief in the temporary nature of losses, thereby encouraging investors to hold onto winning assets longer and sell losing ones more readily.

Original authors: Siliu Chen, Fei Ren

Published 2026-05-11

📖 4 min read☕ Coffee break read

CC BY 4.0

Original authors: Siliu Chen, Fei Ren

Original paper licensed under CC BY 4.0 (http://creativecommons.org/licenses/by/4.0/). ✨ This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer

The Big Idea: The "Sell Winners, Keep Losers" Habit

Imagine you have a garden with two types of plants: Flowers (stocks that are making you money) and Weeds (stocks that are losing money).

Most people have a weird habit with their garden:

The Flowers: As soon as a flower blooms and looks nice, they immediately pick it and put it in a vase. They want to enjoy the win right now.
The Weeds: When a plant starts dying or looking sick, they refuse to pull it out. They keep watering it, hoping it will magically recover, even though it's just taking up space.

In finance, this is called the Disposition Effect. It's an irrational behavior where investors sell their winning stocks too early and hold onto their losing stocks for too long.

The Study's Question: Does "Glass Walls" Help?

The researchers wanted to know: Does seeing more information about a company change this habit?

Think of a company as a house.

Low Transparency: The house has thick curtains and locked doors. You can't see what's happening inside. You don't know if the owner is cooking a great meal or burning the kitchen down.
High Transparency: The house has glass walls. You can see everything clearly. You know exactly how the business is running.

The study asks: If we replace the thick curtains with glass walls (increase transparency), do investors stop picking the flowers too early and stop holding onto the weeds so desperately?

What They Found

The researchers looked at real trading data from a popular Chinese investment app (like a social network for stock traders). They compared investors who bought stocks in "glass houses" (high transparency) versus "curtained houses" (low transparency).

The Result: Yes, the glass walls help. When a company is very transparent, investors are less likely to fall into the "sell winners, keep losers" trap.

Why Does This Happen? (The Mechanism)

The paper explains why this happens using a concept called Confidence.

1. When the stock is winning (The Flower):

In a Curtained House: Investors are nervous. "Is this win real? Maybe it's a fluke. I should grab the money and run just in case." So, they sell too soon.
In a Glass House: Investors can see the business is strong. They think, "I know exactly how this company works, and it's doing great. I'm confident this will keep growing." Because they are confident, they don't sell as quickly. They hold the flower longer.

2. When the stock is losing (The Weed):

In a Curtained House: Investors are scared. "I don't know what's wrong. Maybe it's a disaster. I should sell before it gets worse." (Though often, they still hold due to hope, but the fear is high).
In a Glass House: Investors can see the problem, but they also see the long-term plan. They think, "Okay, this plant is sick right now, but I can see the roots are still strong. This is just a temporary bad season." They still hold the weed, hoping it recovers.

The Magic Balance:
The study found that transparency changes the behavior for winning stocks much more than for losing stocks.

It stops people from selling winners too fast (which is good).
It doesn't stop people from holding losers as much as it stops them from selling winners.

Because the "selling too soon" part gets fixed more than the "holding too long" part, the overall bad habit (the Disposition Effect) gets smaller.

Who Benefits Most?

The study also found that this "glass wall" effect works even better for:

State-owned companies (companies owned by the government).
Big companies (large market value).

It seems that when these big, powerful entities open their windows, investors feel even more secure and make more rational decisions.

The Takeaway

If a company is open, honest, and clear about what it's doing (High Transparency), investors feel more confident. This confidence stops them from panicking and selling their good investments too early. While they might still hold onto bad investments a bit too long, the net result is that they make fewer irrational mistakes overall.

In short: Clear windows lead to calmer, smarter investors.

Technical Summary: Corporate Transparency and the Disposition Effect

Problem Statement
The disposition effect is a well-documented behavioral anomaly where investors irrationally sell profitable assets too early while holding onto losing assets for too long, contradicting the rational agent assumption of traditional finance. While extensive literature has examined how investor characteristics (e.g., gender, education, experience) and portfolio visibility influence this behavior, there is a significant gap regarding the impact of firm-level information environments. Specifically, no prior study has investigated whether corporate transparency influences the disposition effect exhibited by individual investors holding that specific company's stock. This study addresses this gap by examining if and how improvements in corporate transparency mitigate the irrational selling biases of individual investors.

Methodology
The study utilizes a unique dataset of real trading records from "Xueqiu," a prominent Chinese social investment platform. The sample covers 11,323 real trading portfolios and 1,115,839 transaction records from June 2016 to May 2023. The data includes transaction times, prices, holdings, and portfolio IDs.

Dependent Variable: A binary variable indicating whether a stock was sold (Sell).
Key Independent Variable: A constructed Corporate Transparency Index (Transpr). This index aggregates five dimensions:
1. Earnings Quality (measured by the absolute value of discretionary accruals from the adjusted Jones model, multiplied by -1).
2. Information Disclosure Evaluation (scores A–D from Shanghai and Shenzhen Stock Exchanges).
3. Number of Analysts Covering the Company.
4. Analysts' Earnings Forecast Accuracy.
5. Audit Firm Quality (Big 4 vs. non-Big 4).
Model Specification: The authors employ Probit and Logit regression models to estimate the probability of selling. The baseline model tests the interaction between the gain/loss status of a position (Gain) and the transparency level.
- Equation: $Sell_{ijt} = \beta_0 + \beta_1 Gain_{ijt} + Controls_{ijt} + \epsilon_{ijt}$
- The coefficient $\beta_1$ on Gain captures the disposition effect (the increased probability of selling when the stock is profitable).
Analytical Approach:
1. Grouped Regression: Stocks are categorized into quartiles based on their firm's transparency index to compare the magnitude of the disposition effect across groups.
2. Robustness Checks: The study employs interaction terms with a transparency dummy variable, Propensity Score Matching (PSM) to control for investor experience bias, and sub-sample analyses based on the pre- and post-COVID-19 periods.
3. Mechanism Analysis: The authors analyze holding periods and trading frequencies to understand how transparency alters investor behavior under gain and loss conditions.
4. Heterogeneity Analysis: The impact of transparency is tested across State-Owned Enterprises (SOEs) vs. Non-SOEs and Large vs. Small market capitalization firms.

Key Results

Existence of Disposition Effect: The baseline results confirm a significant disposition effect among Chinese individual investors; the probability of selling increases significantly when a stock is held at a gain compared to a loss.
Impact of Transparency: An increase in corporate transparency significantly reduces the disposition effect. As transparency moves from low to high quartiles, the marginal effect of Gain on the probability of selling decreases sequentially.
Mechanism (Asymmetric Confidence): The reduction in the disposition effect is driven by an asymmetric impact on selling behavior:
- Profitable Stocks: Higher transparency increases investor confidence in holding profitable stocks, significantly reducing the bias to sell them too soon.
- Losing Stocks: Higher transparency also reduces the probability of selling losing stocks (exacerbating the holding bias), as investors perceive losses as temporary and maintain confidence in long-term prospects.
- Net Effect: The reduction in the probability of selling profitable stocks is greater than the reduction in the probability of selling losing stocks. Consequently, the overall gap between selling winners and losers narrows, reducing the disposition effect.
Heterogeneity: The mitigating effect of transparency is more pronounced for State-Owned Enterprises (SOEs) and firms with large market capitalizations compared to Non-SOEs and small-cap firms.
Robustness: The findings hold across various specifications, including PSM to address sample selection bias, interaction term models, and analyses restricted to first-sale transactions or full liquidations. The effect remains consistent even when controlling for the market turbulence caused by the COVID-19 pandemic.

Significance and Contributions
The paper claims three primary contributions to the literature:

Novel Perspective: It is the first study to examine the impact of corporate transparency on the disposition effect, shifting the analytical focus from individual investor characteristics to firm-level information environments.
Mechanism Clarification: It elucidates the mechanism by which transparency influences trading behavior, identifying "asymmetric confidence" as the driver. Specifically, transparency helps investors distinguish between temporary losses and fundamental value, leading to more rational long-term holding strategies that dampen the irrational urge to realize gains prematurely.
Practical Implications:
- For Investors: Choosing stocks of more transparent companies can help mitigate behavioral biases. Investors are advised to implement stop-loss strategies rather than relying on the belief that transparent companies will automatically rebound from losses.
- For Firms: Enhancing transparency can reduce abnormal stock price volatility caused by irrational investor behavior, thereby improving firm value and market perception.
- For Regulators: Strengthening transparency regulations is recommended to promote market stability and efficiency by reducing irrational decision-making.

Limitations
The authors modestly acknowledge limitations, noting that the transparency index is measured annually, which may not capture intra-year changes. Additionally, the reliance on Xueqiu data (limited to the latest 200 transactions per user) may introduce sample comprehensiveness issues compared to full broker account data.