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Individual investor attention to stock split and the disposition effect

Wendy Kesuma (Faculty of Economics and Business, Universitas Indonesia, Depok, Indonesia)
Irwan Adi Ekaputra (Faculty of Economics and Business, Universitas Indonesia, Depok, Indonesia)
Dony Abdul Chalid (Faculty of Economics and Business, Universitas Indonesia, Depok, Indonesia)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 19 May 2021

167

Abstract

Purpose

This 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/approach

This 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.

Findings

Unlike 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/implications

This 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 implications

Practically, individual investors should look for stock-related information to reduce disposition bias.

Originality/value

To 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.

Keywords

Acknowledgements

The authors thank Prof. Ali Kutan, Prof. Zhaojun Zhang, and Zaafri Ananto Husodo, Ph.D., for their essential feedback. We also thank the authority of KSEI for the transaction data used in this study. Lastly, the authors thank Universitas Indonesia for the research grant No. 1229/UN2.R3.1/ HKP.05.00/2018.

Citation

Kesuma, W., Ekaputra, I.A. and Chalid, D.A. (2021), "Individual investor attention to stock split and the disposition effect", Review of Behavioral Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/RBF-11-2020-0274

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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