Capital gains and trading

This paper verifies that prospect theory preferences and speculative motives are drivers of trading in relation to capital gains at the stock level. Initially, investors are less likely to sell a stock as capital gains or losses become larger, consistent with the prospect theory. When capital gains exceed some threshold, investors are more likely to initiate selling as profits increase, in line with speculative motives. The trading-gains relation is more prominent for stocks with a larger proportion of irrational shareholders. The findings are robust to various subgroup analyses.