Influence of endogenous reference points on the selling decisions of retail investors

Abstract

Using trader‐level data, we examine the impact ofthe stock‐specific endogenous reference points, the‘realized‐return’and the‘peak‐return’of the priorround on the selling propensity in a subsequent in-vestment round in the same asset. The sellingpropensity rises significantly near the endogenous re-ference points. The significance is greater when theholding period is relatively shorter and when the timegap between the consecutive rounds is lower, implyinga recency effect. Finally, the impact is more substantialon traders holding fewer stocks. The results imply thattraders' prior stock‐specific experience plays a sig-nificant role in the reference point formation.