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Corporate transparency and the disposition effect.

Siliu Chen1, Fei Ren1

  • 1School of Business, East China University of Science and Technology, Shanghai, China.

Frontiers in Psychology
|November 3, 2025
PubMed
Summary
This summary is machine-generated.

Increased corporate transparency reduces the disposition effect, where investors sell winners too soon and hold losers too long. Greater transparency encourages investors to hold stocks longer, lowering overall trading and mitigating this irrational financial behavior.

Keywords:
corporate transparencydisposition effectfirm levelindividual investorsirrational behavior

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Area of Science:

  • Behavioral Finance
  • Corporate Governance
  • Investment Management

Background:

  • The disposition effect is a documented cognitive bias in investment decision-making.
  • Individual investors often exhibit this irrational behavior, impacting portfolio performance.
  • The role of firm-level characteristics, such as transparency, in mitigating this bias is not fully understood.

Purpose of the Study:

  • To investigate the influence of corporate transparency on the disposition effect among individual investors.
  • To determine if higher firm-level transparency alters investor trading behavior related to profitable and losing stock positions.

Main Methods:

  • Empirical analysis of individual investor trading data correlated with corporate transparency metrics.
  • Statistical modeling to assess the relationship between transparency levels and the propensity to sell winning or losing stocks.

Main Results:

  • A significant negative correlation was found between corporate transparency and the disposition effect.
  • Increased transparency leads individual investors to hold stocks longer, reducing trading frequency.
  • The reduction in selling probability is more pronounced for profitable stock positions.

Conclusions:

  • Corporate transparency serves as a crucial factor in curbing the disposition effect in individual investors.
  • Enhancing transparency can lead to more rational investment behavior and potentially improved investor outcomes.
  • Findings suggest that investors' perception of firm transparency influences their risk-taking and selling decisions.