The Information Content of Realized Losses

Abstract

Examining the trades of company insiders, I find that a sale of stock at a loss is a much more negative signal about future returns than is a sale of stock at a gain. I consider a range of explanations for my results and find that the evidence is most consistent with the idea that investors derive direct disutility from selling a stock at a loss. Since selling a stock at a loss is painful, an investor who sells at a loss must have particularly negative information. This result offers a novel measurement of the strength of the disposition effect. Received December 7, 2015; editorial decision December 18, 2017 by Editor Robin Greenwood. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online.