Adaptation Level of the Reference Point and Investigating the Symmetrical Effect of Influential Variables

This study aims to examine the adaptation level of the reference point, the dynamic level of this point, and the intensity of investors' reaction to gains and losses based on prospect theory. The basis of the study is the adaptation of the reference point based on the received stimuli and considering the disposition effect. In this regard, a sample of 103,937 firm-year observations of the firms listed on the Tehran Stock Exchange (TSE) during the years 2008 to 2020 and an integrated panel data approach was used to examine the research hypotheses. The results show that, because investors act on the stimuli they receive to correct their reference point, the reference point cannot be fixed. Five variables (stimuli) – gain (loss) amount, gain (loss) duration, simultaneous effect of amount and duration of gain (loss), positive (negative) EPS adjustment, and positive (negative) coverage percentage of EPS – have a significant effect on trading volume and reference point adaptation level, and they can be mentioned as adaptation determinant factors of the reference point. The results show that the intensity of investors' reaction to gains and losses is not the same. In most studies, the reference point is assumed to be fixed and static. The reference point does not appear to be static and varies according to the conditions and stimuli received. In this research, the researchers intend to identify the factors affecting the reference point, to provide a dynamic model that can explain how investors' reference point is adapted.