Managerial disposition effect: Evidence from China

This study investigates the disposition effect of managers on the stocks of their own companies, where they are insiders. Using Chinese managerial open-market stock trading data from 2007 to 2020, first, we demonstrate that managers exhibit a significant disposition effect (i.e., they tend to sell paper gains but hold onto paper losses). Second, we show that managers have a sign realization preference (i.e., they are more likely to sell small paper gains than small paper losses) and a magnitude preference (i.e., their selling probability generally increases with paper gains but decreases with paper losses), lending support to the prospect theory. Third, we confirm that the managerial disposition effect cannot be entirely explained by insider-selling constraints, but rather reflects managers' willingness and preference for realizing more paper gains. Finally, we show that the superior information held by managers only partially corrects the disposition effect. This study adds to the understanding of managers' disposition effect and provides new implications for the prospect theory.