V-shaped Disposition Effect and Investors ’ Underreaction to Earnings News

We attempt to explain investors’ underreaction to earnings news using the newly documented refinement of the disposition effect, which is the V-shaped net selling propensity (VNSP). Using the novel dataset containing more specific stock-level information on trading activity by different types of investors, we find the both large unrealized capital gains and losses positively predicts subsequent stock returns in the Korean stock markets. Furthermore, investors’ net selling propensity affects stock price drift after earnings announcement. Among the good news stocks, a post announcement drift is more pronounced when they suffer from higher net selling propensity by stockholders. Furthermore, these empirical results only hold when we construct VNSP based on individual trading activity. Interestingly, the classic disposition effect does not induce underreaction to earnings news in our