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Gambling and Comovement
Abstract
This study shows that correlated trading by gambling-motivated investors generates excess return comovement among stocks with lottery features. Lottery-like stocks comove strongly with one another, and this return comovement is strongest among lottery stocks located in regions where investors exhibit stronger gambling propensity. Looking directly at investor trades, we find that investors with a greater propensity to gamble trade lottery-like stocks more actively and that those trades are more strongly correlated. Finally, we demonstrate that time variation in general gambling enthusiasm and income shocks from fluctuating economic conditions induce a systematic component in investors' demand for lottery-like stocks. Copyright © Michael G. Foster School of Business, University of Washington 2016.
... announcements and the modified MAX effect? Kumar et al. (2016) argued that when lottery demand is high, lottery investors tend to be overoptimistic about the payoffs from buying lottery-like assets, which causes those assets to be overpriced. Because lottery demand is the major cause of the modified MAX effect (Hung and Yang 2018), we explore whether lottery demand changes the relationship between revenue announcements and the modified MAX effect; that is, whether investors may regard high revenue announcements related LHR (RA_LHR) stocks as lotteries instead of new information arrival, when lottery demand is high. ...
... We examine RA_LHR and NORA_LHR strategies conditional on the lottery characteristics of stocks. Following Kumar et al. (2016), we create a composite 25 We test whether the modified MAX effect exists in each of the three months after the portfolio formation. The results are reported in Table 18 in the Appendix 3 and suggest that high LHR stocks continue to provide lower returns in each of the three months after the portfolio formation. ...
... Kumar (2009) suggested that an unfavorable business climate may increase gambling. However, when the business climate improves, investors not only have higher risk tolerance and optimism toward the stock market but also are able to allocate more funds to lottery-like stocks (Kumar et al. 2016), resulting in a higher lottery demand. Content courtesy of Springer Nature, terms of use apply. ...
Using the modified maximum daily return measure (LHR) defined as the difference between upward limit-hitting rates and downward limit-hitting rates, our paper documents the higher LHR, the lower subsequent returns, i.e., the so-called modified MAX effect, in the Taiwan stock market. Since Taiwan stock market requires listed companies to report their revenues every month, we further investigate how the arrival of revenue news affects these lottery-like stocks. It is found that when the high LHR is associated with positive shocks from the monthly revenue announcement, the stock becomes significantly less appealing to individual investors. As individual investors’ order imbalances drop substantially after the revenue announcement period, the modified MAX effect is diminished. We also find monthly revenues announcements greatly dilute the importance of quarterly earnings announcements and, therefore, play the more important role in determining the modified MAX effect. Overall, our study suggests that more frequent and promptly financial information disclosures, such as monthly revenue reports, are critical to improving market efficiency and reducing behavioral bias.
... We also contribute to the asset pricing literature by showing that a stock characteristic, i.e., the price magnitude, has an impact on future returns. In the current state, the literature only incorporates price magnitude in asset pricing models as a component of lottery-like features of stocks (Kumar et al., 2016). Our findings permit to explain the following empirical observations: 1) small price stocks comove more together than they comove with large price stocks (Green and Hwang, 2009) and, 2) the overvaluation of small price stocks Birru and Wang (2016). ...
... A more recent literature confirms the peculiarity of small price stocks. Green and Hwang (2009) demonstrate that small (large) price stocks comove more together, than with large (small) price stocks, a result confirmed by Kumar et al. (2016). Green and Hwang (2009) argue that investors believe that small price stocks have "more room to grow" than large price stocks. ...
... Green and Hwang (2009) argue that investors believe that small price stocks have "more room to grow" than large price stocks. Kumar et al. (2016) have a slightly different interpretation, which is linked to the propensity of retail investors to gamble. The two interpretations refer more or less explicitly to the preference of retail investors for positive skewness. ...
... For example, Meng and Pantzalis (2018) classify lottery-type stocks as those in the lowest 50th stock price percentile, the highest 50th idiosyncratic volatility percentile, and the highest 50th idiosyncratic skewness percentile. Kumar et al. (2016), Chen et al. (2021a, b), Gong et al. (2021), and Kwon et al. (2022) use Kumar's (2009) composite lottery index based on idiosyncratic volatility, idiosyncratic skewness, and stock price to proxy for stocks' lottery-like characteristics. Moreover, some researches use the maximum daily return (MAX) as a proxy for lottery-like features (e.g., Bali et al., 2011Bali et al., , 2017Agarwal et al. 2022). ...
... Gould et al. (2023) measure a stock's lottery-like characteristics in terms of idiosyncratic volatility, idiosyncratic skewness, and stock price (Kumar 2009), a stock's maximum single-day return during a month (Bali et al. 2011) as well as a low return for the past month. To the extent that maximum daily return and a low return for the past month are a short-term (one month) proxy for lottery-like characteristics, this study follows Kumar (2009), Kumar et al. (2016), Chen et al. (2021a, b), Gong et al. (2021), and Kwon et al. (2022) and use stock price, idiosyncratic volatility, and idiosyncratic skewness to measure longer period (previous 12 months) lottery-like characteristics. ...
This study examines the effect of lottery characteristics on analysts’ earnings forecasts. We find that analysts are more optimistic for lottery firms. Compensation incentives and access to private information from management are key drivers for analysts’ optimistic forecasts. The optimism of earnings forecast for lottery stocks decreases with analysts’ general and firm-specific experience. Our findings suggest that both behavioral biases and rational incentives help explain analysts’ optimism toward lottery stocks. Moreover, investor sentiment positively affects the effect of lottery characteristics on analyst optimism. Firm-specific risk and market uncertainty enhance the effect of lottery characteristics on analysts’ earnings forecast bias. The level of optimism on lottery stocks increases during up markets and economic expansion.
... Our reasoning is based on the fact that firms located in areas where local residents are prone to gambling (less religious) are more likely to invest in risky investment (Adhikari & Agrawal, 2016;Chen et al., 2014;Hilary & Hui, 2009;Shu et al., 2012). As well, individual investors in faith-based local gambling areas hold lottery-type stocks (Kumar et al., 2011) and trade lottery-like stocks more actively (Kumar et al., 2016). The major implication of these studies is that firms in less religious areas exhibit higher earnings volatility than businesses in more religious areas. ...
... Firstly, we extend the existing local gambling literature and its economic outcomes. Previous studies have mainly investigated how local gambling affects a company's risk-taking behavior (Adhikari & Agrawal, 2016;Alharbi et al., 2022;Chen, Podolski et al., 2014;Hilary & Hui, 2009;Kumar et al., 2011;Kumar et al., 2016;Shu et al., 2012). However, we take a different approach by focusing on the distinct impact of local gambling on earnings management, which captures both the risk-taking behavior and earnings volatility of firms located in gambling-prone areas. ...
... The evidence is consistent with the relative tolerance towards gambling risks of Catholics compared with Protestants. Kumar et al. (2016) find strong return co-movements among lottery-type stocks, which are strongest among lottery stocks located in the US regions where investors show stronger gambling tendencies. Ji et al. (2021) document that Chinese firms located in regions with high gambling preferences suffer from greater stock price crash risk, owing to aggressive strategies and speculative accounting practices. ...
... Firms headquartered in high gambling counties have a 0.88% higher likelihood of misreporting: a finding that is significant given the unconditional probability of misreporting of 2significant and positive association between local gambling norms and corporate innovation. LnPatent increases by 0.127 when LnCPRatio moves from the 25th percentile to the 75th percentile: an increase of about 17%Kumar et al. (2016) Gambling norms and return co-movement US: 66,752 stock-year observation from 1980to 2005 Document strong co-movement among lottery-type stocks, which is strongest among lottery stocks located in the regions where investors show stronger gambling tendency. About 14.27% of stocks have a significant exposure to gambling-induced sentiment Chen et al. positive association between local gambling norms and corporate innovation. ...
We synthesise the empirical archival research on the consequences of local social norms on accounting, finance, and corporate governance outcomes in an international setting. The literature reviewed is premised on the theory that corporations do not make decisions, but managers do, and managers are likely to be influenced by the socioeconomic environment of the region in which they operate and/or by the people with whom they interact. To provide a structure to our review, we identify social capital, religiosity, gambling norms, and corruption culture, as four constructs of local social norms and link these with financial reporting and external auditing, financial, investment, and dividend decisions, capital market consequences and finally, corporate governance and corporate social responsibility behaviour of firms. We highlight some limitations of the existing research and offer some suggestions for future research.
... Considering that gambling investors prefer stocks with high trait volatility, high trait skewness, and low prices (Kumar, 2009), we measure the degree of investor gambling tendency, referring to the method adopted by Kumar et al. (2016). The low price reflects the gambling tendency of pursuing big gains with small costs, high trait skewness implies a small probability of extremely high returns, and high trait volatility indicates a high risk for investment. ...
... Finally, we obtain the monthly gambling indices from Equation (6) and calculate the arithmetic average of the value over the fiscal year as a measurement of investor gambling tendency (Gamble). A larger value of Gamble means that the stock's actual and potential investors are more likely to be gambling investors (Kumar et al., 2016). ...
In China, investors generally make decisions depending on the intonation of executive announcements. A total of 20,328 observations are sampled from the Chinese equity market between 2005 and 2019. We perform principal component analysis to produce monthly sentiment indices and calculate the weighted average of the value over the fiscal year to measure the degree of investor sentiment. The results of the empirical analysis reveal that: (1) there is a significant positive correlation between market-level investor sentiment and executive tone, (2) stock price and trading-volume pressures on executives, and firm-level investor expectation and gambling tendency positively moderate the relationship between investor sentiment and executive tone, (3) executive optimism does not mediate the association between investor sentiment and executive tone, and (4) manipulated and real intonations are non-homogeneous tactics adopted by rational managers to cater to changes in investor sentiment. These findings indicate that executives' intonations are both an extension of firms' current and past performances and managers' decision-making based on sentiments and behaviors of irrational investors, which are consistent with the Catering Theory. In addition, rational executives tend to adopt various intonation tactics to respond to investor sentiment to avoid declines in stock prices and trading volumes.
... Recently, many studies have shown that different social norms in geographic regions affect individual investor's trading behavior (Kumar, 2009;Kumar et al., 2011;and Kumar et al., 2016). We thus further investigate whether these differences drive the effect of the lunar calendar. ...
... They find that investors prefer to hold lottery-type stocks in regions with a higher ratio. Kumar et al. (2016) show that the return comovement has a significant effect among lottery stocks located in regions with a greater propensity to gamble. ...
We examine whether individual investors pay more attention to the stock market on auspicious days. We define an auspicious day as being on the Chinese lunar calendar, which is the common social norm in Chinese society. This norm is reflected in (i) more extensive and (ii) less profitable trading. Furthermore, this effect is heightened in cities with more elderly, more temples of the Wealth God, and more gambling sentiment. Individual investors' preferences for lottery-like and preferred stocks are essential mechanisms to explain our findings. We provide a first understanding of the effect of a social norm on individual investors' trading behavior.
... Culture influences business decisions by affecting human cognitive activities and ways of thinking (Venkateswaran & George, 2020). People's risk appetite increases, and business and investment decisions are more aggressive in areas where gambling culture is prevalent Kumar et al., 2011Kumar et al., , 2016. For example, Christensen et al. (2017) found that firms operating in areas with a high propensity to gamble tend to adopt a speculative and risky stance when reporting corporate performance and disclosing corporate information, concealing undesirable information. ...
Based on the theory of new institutionalism and trait activation, we empirically evaluated the role of gambling culture on aggressive corporate taxation. A positive association was found between gambling culture and tax aggressiveness. Because the gambling culture increased the risk preferences of firm executives. The relationship was more pronounced in non-state-owned firms, firms with a high proportion of male executives, short-sighted executives, local CEOs, and those located in areas with less intense tax regulation and lower levels of Islamic faith. The findings enrich studies investigating the economic consequences of gambling culture and provide innovative ideas for external regulators to formulate anti-avoidance measures.
... The investment level of a region will affect the investment decisions of individuals and the financial decisions of Companies in the region. Some researchers have found that in areas with high gambling preferences, investors show a stronger tendency to hold lottery tickets and stocks, stock option plan for corporate employees is more popular, the first-day return after an initial public offering is higher, and the premium of lottery stocks is greater [25]. Chen et al. document that companies with strong gambling preferences tend to take on more risky projects. ...
Based on the sample of Chinese A-share listed companies from 2006 to 2020, this paper studies the impact of regional investment preference on corporate cash holdings. We find that the stronger the investment preference in the region where the company is located, the higher the level of the company’s cash holdings. After a series of robustness tests, such as the instrumental variable method and propensity score matching method, the main regression results of this paper remain unchanged. The mechanism test shows that the regional investment preference can increase the preventive cash holding and strategic cash holding motivation of enterprises so as to improve the cash holding level of companies. Further research shows that strict internal control and external supervision can weaken the impact of regional investment preference on corporate cash holdings. This paper not only enriches the research on the factors affecting enterprise cash holding but also deepens the theoretical cognition of the impact of the regional environment on corporate governance.
... Our article makes several contributions. First, our article adds to the growing literature that investigates how investors' gambling behavior affects their investment decisions and asset returns Tan (2009), Kumar (2009a), Bali et al. (2011), Green and Hwang (2012), Kausar, Kumar, and Taffler (2013), Dorn, Dorn, and Sengmueller (2015), Byun and Kim (2016), and Kumar, Page, and Spalt (2016)). Our article is also broadly related to the literature documenting investors' inefficient response to new information. ...
We document a strong positive initial market reaction to merger announcements from bidders with either large earnings growth or significant earnings decline, relative to those with neutral earnings change, reflecting a U-shaped pattern between bidders’ earnings growth and announcement returns. However, the higher initial returns for bidders with earnings decline subsequently reverse, whereas the higher returns for bidders with high growth do not. We further show that the return patterns are driven by a tendency for retail investors to gamble that merger and acquisition deals initiated by poorly performing bidders will generate high synergies.
... As an investment, a Lotto ticket exhibits a large negative expected return (because of the takeout rate) and a large positive skewness (because of a huge jackpot compared to the ticket cost). The typical Lotto player is therefore a skewness seeker, as are many individual investors (Mitton and Vorkink, 2007;Kumar, 2009;Hoffmann and Shefrin, 2014;Kumar et al., 2016;Broihanne et al., 2016). Moreover, the existence of rollovers may dramatically increase the skewness of the distribution of prizes. ...
Conscious selection is the mental process by which lottery players select numbers nonrandomly. In this paper, we show that the number 19, which has been heard, read, seen, and googled countless times since March 2020, has become significantly less popular among Belgian lottery players after the World Health Organization named the disease caused by the coronavirus SARS-CoV-2 “COVID-19”. We argue that the reduced popularity of the number 19 is due to its negative association with the COVID-19 pandemic. Our study triangulates evidence from field data from the Belgian National Lottery and survey data from a nationally representative sample of 500 Belgian individuals. The field data indicate that the number 19 has been played significantly less frequently since March 2020. However, a potential limitation of the field data is that an unknown proportion of players selects numbers randomly through the “Quick Pick” computer system. The survey data do not suffer from this limitation and reinforce our previous findings by showing that priming an increase in the salience of COVID-19 prior to the players’ selection of lottery numbers reduces their preference for the number 19. The effect of priming is concentrated amongst those with high superstitious beliefs, further supporting our explanation for the reduced popularity of the number 19 during the COVID-19 pandemic.
... The site's use of opaque algorithms places audiences at greater risk than Privacy they would otherwise be in environments of exchange where the outcomes are known (Napoli, 2014) due in part to differences in participant purposes, as participants seek affect while organizations seek revenue (Schüll, 2012). Given the tendency for NBA Top Shot to be viewed by some as an investment platform, engagement with lottery-like stocks or assets has previously been correlated with a propensity to gamble (Kumar et al., 2016), further suggesting the blurring of gambling, gaming, and markets. This connection is made more apparent by the adoption of fantasy sports (Cohen, 2021), which position sport as an environment where athletes' potential to bring monetary returns is assessed. ...
Non-fungible tokens (NFTs) exist today as a component of a broader, ever-evolving financial environment in which questions of value, ownership, and intention are characterized by their ambiguity. This article considers Dapper Labs “NBA Top Shot,” a blockchain-backed website inviting NBA fans to join in “a new era in fandom” wherein they may acquire NFTs of NBA highlights by opening “packs,” which are functionally similar to trading cards. NFTs reflect the pressures of market forces, as well as increased cultural and economic emphasis on marketization, financialization, commodification, and the ubiquity of gambling-like designs and interactions. Furthermore, this study explores tensions present in differing intentions for the NBA Top Shot platform and Discord server, the diffuse nature of user conversations (a nature that disregards topical boundaries), and audience attention toward marketization and investment interests. The commodification of the NBA fan experience illustrates a shared social pressure to more readily think of one’s life, interactions, and consumptive behaviors through the lens of the investor, fostering financial attitudes that normalize instability and encourage risk-taking beyond the scope of a platform where purchase-dependent interactions serve as a source of joy and social experience in a venue representing a perceived electronic gold rush.
... IV regression using religiosity lagged by 3 years as an instrument confirms the main findings. Kumar et al. (2016) Kumar et al. (2011). Overall, results related to religiosity and CSR initiatives are mixed. ...
In this systematic literature review we synthesize the empirical archival research on the consequences of local social norms (i.e. social capital, religiosity, gambling, and corruption) on accounting, finance, and corporate governance outcomes in an international setting. This review focuses on how various local social norms are linked with issues, such as financial reporting, auditing, financial policies, investment, innovation, and corporate social responsibility activities. The literature reviewed is premised on the theory that corporations do not make decisions, but managers do, and managers are likely to be influenced by the socioeconomic environment of the region in which they operate and/or by the people with whom they interact. While our review highlights some shortcomings of the theory underpinning existing studies, we focus on the methodological limitations of this strand of research that should be addressed more effectively in future research.
... Barberis et al. (2005), for instance, argues that investors with a specific preference have a synergistic effect in trading, which can lead to non-fundamental co-movement of the stock price. Kumar et al. (2016) examines the relationship between investor's gambling preference and stock price co-movement, and finds that investor's gambling preference is positively correlated to the fluctuation of the stock price. Chan and Chui (2016) documents that there is a strong gambling preference of investors in the Hong Kong stock market, and the gambling attitude of investors is one of the driving forces to affect the stock price movement. ...
Considering the strong gambling preference of retail investors in emerging markets and using the data of Chinese A-share listed companies from 2000 to 2018, this paper constructs an index of investor's gambling preference based on the theory of explicit preference and develops a factor model to capture the risk premium of gambling by introducing gambling factors. The results show that the factor model not only fits the gambling characteristics of the Chinese stock market well but also has strong explanatory power for common market anomalies. Through the index of capital gains over-hang (Wang et al., 2016), this paper further finds that facing different degrees of losses, investors will show different gambling preferences. The factor model also shows stronger explanatory power in the sample with more losses, revealing the investment characteristics of retail investors that the more you gamble and the more you lose. This study would be meaningful for exploring behavioral pricing factors, understanding emerging stock markets and supporting investment practice.
... First, our study contributes to the rich literature on the explanation of the PEAD phenomenon (Bernard and Thomas 1989;Daniel et al. 1998;Frazzini 2006;Hirshleifer et al. 2009;DellaVigna and Pollet 2009) by highlighting the role of retail investors' inattention. Second, our work extends the growing literature on the gambling-induced investment behaviors of individual investors and their implications for firms and financial markets (Blau et al. 2016;Kumar et al. 2016). Our paper provides important supporting evidence for the notion that delayed incorporation of information into stock prices of lottery-type firms can be partly driven by cyclicality in local gambling-minded investors' trading activity. ...
We show that retail investors’ cyclical demand for lottery stocks, which tends to peak at the turn-of-the-month (ToM), has implications for firms’ financial activities. Consistent with the notion that the peak in demand is driven by a propensity to gamble that is associated with inattention, we find underreaction to earnings news issued at the ToM by lottery-type firms located in areas with many gambling investors. Lottery-type firms are more likely to issue bad earnings news at ToM, thus benefiting from a less negative price reaction. Similarly, seasoned equity offerings (SEOs) by lottery-type firms are often strategically timed at the ToM, conceivably to take advantage of local retail investors’ underreaction and thereby temper the typically negative immediate stock price reaction to the issuance news. Further suggestive of strategic exploitation of local investors peak in demand at the ToM period, lottery-type firms’ SEOs at the ToM are also more likely to be offered via an accelerated method that saves the direct marketing costs associated with other offer methods.
... Although trading as gambling may only concern a small number of retail investors, it can also materially affect prices in the financial markets due to the disproportional trading volume and coordination by gamblers. For example, Han and Kumar (2013) find that lottery-type stocks favored by retail investors with high gambling propensity are overpriced, Kumar et al. (2016) show that trading by gambling-motivated investors generates excess return comovement among stocks with lottery features, and Bali et al. (2017) argue that the low beta anomaly can be explained by retail investors' demand for lottery-like stocks. ...
This study shows that a group of individual investors in the financial markets displays symptoms of compulsive gambling, or an addiction to trading, based on a standard diagnostic checklist from the American Psychiatric Association. In a representative sample of Dutch retail investors, we find that 4.4% of the investors meet the criteria for compulsive gambling in the financial markets. Another 3.6% meet the criteria for problem gambling, which is a less severe form of gambling disorder. Investors with symptoms of compulsive gambling problems tend to follow a more active and speculative trading style, indicated by a higher frequency of stock trading, day-trading and investing in derivatives and leveraged products.
We provide an overview of the literature investigating (retail) investors' demand for lottery‐like stocks. We summarize different sets of lottery proxies and discuss their implications for cross‐sectional pricing of individual stocks. We present empirical evidence and summarize the findings including (i) the robustness of the lottery demand effect using an extended data set, (ii) the economic underpinnings of the lottery demand effect, and (iii) the explanatory power of the lottery preference factor for established stock market anomalies.
This study demonstrates that skewness preference of investors is an important driver of various market anomalies. Using a combined measure of mispricing based on 11 prominent anomaly strategies, we show that return predictability associated with the mispricing component of market anomalies is stronger among firms with higher idiosyncratic skewness. The predictability differences are driven by the higher underperformance of high-skewness firms in short anomaly portfolios. Skewness does not affect the performance of long anomaly portfolios. Portfolio holdings data from a retail brokerage firm show that investors with stronger skewness preferences assign relatively larger weights to stocks in short anomaly portfolios.
This paper was accepted by Karl Diether, finance.
Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4898 .
Purpose
This study aims to examine the relationship between investor gambling preferences and stock returns, using data for all firms listed in Shanghai A-share market during 2016 and 2021.
Design/methodology/approach
This study employs price and trading volume data to capture the behavioral characteristics and gambling preferences of investors. Using the Fama-French three-factor and five-factor models to estimate benchmark returns, this study investigates whether investing in gambling stocks can yield positive excess returns.
Findings
The study reveals that stocks identified as gambling stocks generate high returns in the month they are identified as such but subsequently experience a significant drop in excess returns compared to non-gambling stocks over the following one to six months. These results are found to be consistent across different methods used to classify gambling stocks and across various industry sectors.
Research limitations/implications
This research provides insights into the risk-return tradeoff of different stock types and the factors that fuel irrational investment behavior. This research underscores the importance of considering the behavioral elements of investment, particularly in emerging markets where individual investors have a significant impact.
Practical implications
This study advises investors to avoid adopting a gambler or speculative mindset and instead make well-informed and calculated investment decisions that are in line with investors financial objectives and risk appetite. This approach can help create a more stable and sustainable financial market.
Originality/value
This study provides new evidence on the relationship between gambling preferences and future stock returns in financial markets and sheds new light on the important role of irrational factors in investment decisions.
This study offers a comprehensive and multidisciplinary review of the research on the antecedents of investor valuation in the management, accounting, and finance literature. Despite the growing recognition of the importance of investors and financial markets, our current understanding of the factors that drive investor valuation remains incomplete. To address this gap, we classify the existing literature on investor valuation into three perspectives: social, cognitive, and economic. The social perspective examines how social forces, such as institutional norms and pressure, shape investor valuation. The cognitive perspective focuses on the psychological underpinnings of investors’ valuation decisions, while the economic perspective emphasizes how investors determine the value of firms through rational cost-and-benefit calculations. This review compares the research on investor valuation in the management literature to that in the accounting and finance literature, identifying gaps in the management literature and discussing emerging trends that may influence investor valuation. The review also proposes an agenda for future research. In conclusion, this study illuminates the intricate and multifaceted nature of investor valuation, as well as the underlying factors that influence it.
We provide a simple method to track firm-specific investor gambling intensity based on the publicly available transaction data. This identification approach effectively incorporates information on what and how much to buy in the trading decision of an investor with a gambling preference. With empirical analysis based on data of the Chinese stock market from January 2003 to May 2021, we document that investor gambling intensity is strongly persistent and significantly predicts future stock returns, which is not a rediscovery of the well-known lottery effect. Stocks with high aggregate gambling intensity underperform stocks with low aggregate gambling intensity by approximately 117 basis points over the following month. Several potential explanations for such empirical findings are examined, and we document support for the explanation based on information diffusion.
We employ the generalized forecast error variance decomposition based on the vector autoregression model to investigate factors’ volatility spillovers. Furthermore, we investigate the relationship between factor volatility spillovers and their premia via the portfolio analysis. We find: (1) North America is the net transmitter of volatility shock, while the Asia-Pacific is the net receiver; the profitability factor, RMW, is the net transmitter. (2) Volatility spillovers would be intensified after major risk events. (3) A positive relationship exists between the volatility spillovers and factor premia, better explained by factor momentum. Our findings are meaningful for risk management and practical investing.
We provide evidence that casino openings can have spillover effects on an individual's portfolio risk‐taking. Using investor‐level brokerage data and the initial legalization and opening of commercial casinos in the United States as a quasi‐natural experiment, we find that, after a casino opens in close geographical proximity to investors, those with a high propensity to gamble (PTG) increase their idiosyncratic portfolio risk by 12.88% relative to those unlikely to gamble. This effect lasts for approximately 3 months and does not affect systematic portfolio risk. These results suggest that increased access to gambling can temporarily increase portfolio risk‐taking for those with a PTG.
Under the background of Chinese market segmentation, whether government-led administrative division adjustments can promote regional economic integration is a practical issue. Taking interregional firms’ stock price comovement as a micro measurement of regional integration, this paper investigates the regional integration effect of administrative division adjustments, i.e., city–county mergers. We find that stock price comovement between county-level and municipal district-level firms in the merged counties and municipal districts significantly improve after city–county mergers, particularly in regions with a higher degree of market segmentation and lower degree of marketization. We further find that the increase in stock price comovement caused by city–county mergers emerges from the increase in comovement of real activities between firms in the merged counties and municipal districts. Taken together, our results suggest that government-led administrative division adjustments effectively promote regional integration.
We show that individual stock returns comove more with market returns when there are climate disasters such as hurricanes and floods. Comovement increases in the month of and the month following the disaster before declining back to normal levels. The disaster impact is stronger in recessions and crisis periods but is evident in all periods. The increased return correlation stems more from an increase in covariance than an increase in stock or market standard deviation. Moreover, we show climate events have a greater impact on comovement in stocks with greater sensitivity to their local economy and higher information asymmetry.
This study examines the influence of local gambling attitudes on audit quality. As a preference for gambling correlates to a greater tendency to take risks, we hypothesize that auditors make a greater magnitude of audit adjustments for clients headquartered in gambling‐prone areas to reduce heightened audit risk. Consistent with our hypothesis, the empirical results show a positive relation between local gambling attitudes and the magnitude of audit adjustments. Further analyses show that this association is more pronounced when the regulatory cost is higher, and when the board chair or CEO comes from a gambling‐prone area. We also find evidence that gambling culture results in greater magnitudes of both upward and downward audit adjustments, audit firms appoint more experienced audit partners to gambling‐prone clients, and there is a fee premium for gambling‐prone clients.
We study the impact of time-varying lottery demand on first-day returns and the poor long-term performance of IPOs. Lottery demand – measured in terms of option-implied probability weighting – is associated with significantly higher first-day returns, tantamount to higher IPO underpricing and more money left on the table. Interacting the time variation in lottery demand with cross-sectional expected skewness reveals that IPO returns are particularly driven by the interaction between market-wide lottery demand and asset-specific lottery characteristics. When expected skewness meets low lottery demand, there is virtually no effect of skewness on first-day returns. In the long run, IPOs issued in high lottery demand regimes are more likely to perform poorly for up to five years after the IPO.
We find that when a U.S. domestic firm becomes a multinational (MNC), its returns comove more with those of existing multinational firms and less with those of purely domestic firms in the following year. This result is robust to a propensity score matching method and an exogenous shock. Turnover comovement and changes in mutual funds' holdings of these MNC initiators further indicate that investors prefer multinationals as a style investment. Moreover, MNC initiators with larger foreign sales experience larger shifts in return comovement. Finally, the effect of MNC initiation on return comovement is relatively weaker for 2000–2016 than for 1979–1997.
We examine the amount of the comovement among real estate investment trusts (REITs) around the world by estimating implied (risk-adjusted) comovements using a factor model approach. Our investigation uses a sample of individual REITs from 21 developed economies from 1990 to 2015 to examine whether cross-border comovements are observable. Our findings provide evidence of comovements after controlling for common risk factors and relevant firm characteristics. Furthermore, we show that the comovements increase over time and are more common for larger and more liquid REITs. The results indicate that country-level factors such as the local market conditions, financial development, domestic exchange rates, credit constraints, and governance significantly affect the amount of comovements.
The classical financial theories have been the base of finance since the mid 18 th century but in the past two and half decade there has been a paradigm shift in the field of financial from classical finance to a new field of finance named as Behavioral Finance. Behavioral Finance is an improvised form of standard finance models, concepts or theories by taking insights from sociology, neuroscience, law, psychology and organisation behaviour. This paper studies about the evolution of standard finance and behavioral finance and its present status in India.
We study options market participants’ trading behaviour before and after the options multiplier increases. After the options multiplier increases, the options market becomes more efficient. By analysing the high-frequency microstructure dataset, we show that local retail and local institutional investors who trade in both options and futures markets trade more after the change in the multiplier. Our results imply that the increase in the market efficiency may be caused by fewer speculators. In addition, lottery stocks are traded more actively after the options multiplier increase.
Media news may cover multiple firms in one article, which establishes a media connection across firms. We propose a media connection strength (MCS) measure between two given firms, which is defined as the number of news articles co-mentioning these two firms. We show that the MCS measure can significantly explain and forecast return comovement of media-connected firm-pairs. Further analyses show that our results are robust to various alternative explanations. We argue that the MCS measure can capture comprehensive and complex correlated fundamental information among media-connected firms and hence may provide a new mechanism for return comovement beyond the existing rational- and behavioral-based explanations.
This paper investigates whether attitudes towards gambling help explain the occurrence of stock price crashes in China. By using a province's per capita welfare lottery sales as a proxy for local gambling preference, we find that firms in regions with stronger gambling preference experience greater stock price crash risk. This result is robust to a battery of sensitivity tests after addressing possible endogeneity issues by using an instrumental variable approach and propensity score matching. Furthermore, we find that the impact of local gambling attitudes on stock price crash risk is mitigated by higher quality internal monitoring and more stringent external monitoring. Lastly, we identify two channels through which gambling preferences intensify stock price crash risk: aggressive corporate strategies and speculative accounting practices. Overall, these findings suggest that local gambling preferences influence firms’ stock price crash risk.
Recent studies have uncovered gambling-motivated trading activities in financial markets in which investors seek lottery-type payoffs by using financial assets. Building on prospect theory, this study provides an important complement to prior research and investigates what period that investors make gambling-motivated trading in the stock market. Examining data from the Chinese stock market, investors are revealed to have asymmetric gambling preferences in gain and loss domains. Investors' gambling motivations are more easily triggered when the market is experiencing a loss. In such periods of time, investors may preferentially opt for lottery-type stocks that offer them a small chance to earn an extreme return at the risk of a likely small loss, simply due to their ‘aversion to a sure loss’.
Although investors accept a negative premium for lottery-like stocks, it is puzzling that the opposite effect is not observed among stocks experiencing large daily losses. We find that many stocks that experience large negative daily returns (MIN) also display large positive daily returns (MAX); therefore the MIN effect is subdued. Once stocks ranked as high-MAX within MIN deciles are removed, we find that the MIN effect produces significantly higher next-month returns. The subsequent-month returns following MIN are particularly higher when stocks experience negative cumulative monthly returns, when firm-specific investor sentiment is low, and when stocks are near their 52-week lows.
This is the first paper that explores lottery-like demand in cryptocurrency markets. Since recent research provides evidence that cryptocurrency returns appear to be short-memory processes, we modify Bali, Cakici and Whitelaw’s (2011) and Bali, Brown, Murray, and Tang’s (2017) MAX measure and employ a weekly forecast horizon and daily log-returns from the previous week to calculate the metric for our portfolio sorts. From an econometric point of view, this study proposes statistical tests that are robust to unknown dynamic dependency structures in the cryptocurrency data. Our results show that average raw and risk-adjusted return differences between cryptocurrencies in the lowest and highest MAX quintiles exceed 1.50% per week. These results are robust to control for Bitcoin risk or potential microstructure effects. Our findings are important also from a theoretical point of view because they suggest that parallel to stock markets, similar behavioral mechanisms of underlying investor behavior are present also in new virtual currency markets.
Considerable theoretical and empirical evidence links price comovements with the behavior of retail investors. Nevertheless, when predicting stock return correlations, research has focused on the leverage effect. We propose a new model of realized covariances that allows exogenous predictors to influence the correlation dynamics while ensuring the predicted matrices' positive definiteness. Using this model, we provide evidence for the predictive power of sentiment and attention measures obtained from social media and web-search query data for the correlations of 35 Dow Jones stocks. At the one-day forecasting horizon, these findings are confirmed by value-at-risk forecasts.
Using Internet search volume for lottery to capture gambling sentiment shifts, we show that when the overall gambling sentiment is strong, investor demand for lottery stocks increases, these stocks earn positive short-run abnormal returns, managers are more likely to split stocks to cater to the increased demand for low-priced lottery stocks, and initial public offerings (IPOs) earn higher first day returns. Further, the sentiment-return relation is stronger among low institutional ownership firms, headquartered in regions where gambling is more acceptable and local bias is stronger. These results suggest that gambling sentiment has a spillover effect on the stock market.
Culture, i.e. our values, norms, beliefs, and expected behaviors, has a significant influence on all aspects of social behavior. In addition, the economic policy-making of governments has been shown to have a significant impact on financial markets. In this paper, for the first time, we combine these two findings to examine whether, and if so how, culture and economic policy uncertainty have an impact on style investing, and more specifically on the popular momentum investing. We also extend previous studies in that we employ additional cultural dimensions, rather than just individualism, such as power distance, uncertainty avoidance, masculinity, and long-term orientation (Hofstede [1980]. Culture's Consequences: International Differences in Work-Related Values. Beverly Hills, CA: Sage, [1991]. Cultures and Organizations: Software of the Mind. London: McGraw-Hill, [2001]. Culture's Consequences. 2nd ed. Beverly Hills, CA: Sage, [2011]. “Dimensionalizing Cultures: The Hofstede Model in Context.” Online Readings in Psychology and Culture 2 (1): 1–26). Our results indicate a strong link between cultural dimensions, economic policy uncertainty, and momentum investing in international financial markets. We argue that this link is not affected by differences in the economic cycle, and/or global variables such as oil prices and global market-related uncertainty, and that apart from individualism, there are other cultural elements, which may influence momentum investing.
We examine whether lagged football betting payoffs result in changes in retail investing in lottery-like stocks. We show that lagged, low betting imbalances are associated with increases in retail stock participation, particularly for lottery-like stocks. This finding implies support for the “break-even” hypothesis that following negative sentiment and losses from football gambling, investors use lottery-like stocks to offset losses or break-even. This result holds for lottery-like stocks defined based on high idiosyncratic volatility and skewness as well as stocks that trade in over-the-counter (OTC) markets. Finally, we address whether the reverse relation exists, finding that only OTC market activity leads to increases in football betting activity but not football betting imbalances. Overall, our paper contributes to the literature investigating the relation between gambling sentiment and stock market activity.
We show that geographical variation in the level of investor sophistication influences local asset prices. Investors in less sophisticated regions exhibit stronger trading correlations, and correspondingly, the returns of firms headquartered in less sophisticated areas are more strongly correlated. Furthermore, we show that local economic conditions have a greater ability to predict local stock returns in the U.S. states with less sophisticated retail investors. These asset pricing results are driven by the sophistication of actual local investors, and not by the characteristics of the broader local population.
We study the trading of individual investors using transaction data and identifying buyer- or seller-initiated trades. We
document four results: (1) Small trade order imbalance correlates well with order imbalance based on trades from retail brokers.
(2) Individual investors herd. (3) When measured annually, small trade order imbalance forecasts future returns; stocks heavily
bought underperform stocks heavily sold by 4.4 percentage points the following year. (4) Over a weekly horizon, small trade
order imbalance reliably predicts returns, but in the opposite direction; stocks heavily bought one week earn strong returns
the subsequent week, while stocks heavily sold earn poor returns.
This paper shows that over time, expected market illiquidity positively affects ex ante stock excess return, suggesting that expected stock excess return partly represents an illiquidity premium. This complements the cross-sectional positive return–illiquidity relationship. Also, stock returns are negatively related over time to contemporaneous unexpected illiquidity. The illiquidity measure here is the average across stocks of the daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firm stocks, thus explaining time series variations in their premiums over time.
This paper shows that a New Year's gambling preference of individual investors impacts prices and returns of assets with lottery
features. January call options, especially the out-of-the-money calls, have higher retail demand and are the most expensive
and actively traded. Lottery-type stocks outperform their counterparts in January but tend to underperform in other months.
Retail sentiment is more bullish in lottery-type stocks in January than in other months. Furthermore, lottery-type Chinese
stocks outperform in the Chinese New Year's Month but not in January. This New Year effect provides new insights into the
broad phenomena related to the January effect.
Using data on the investments a large number of individual investors made through a discount broker from 1991 to 1996, we find that households exhibit a strong preference for local investments. We test whether this locality bias stems from information or from simple familiarity. The average household generates an additional annualized return of 3.2% from its local holdings relative to its nonlocal holdings, suggesting that local investors can exploit local knowledge. Excess returns to investing locally are even larger among stocks not in the S&P 500 index (firms for which information asymmetries between local and nonlocal investors may be largest).
This paper asks whether the stocks of bankrupt firms are correctly priced, and explores who trades the stocks of these firms, and why. We show that firms in Chapter 11 are heavily traded by retail investors who are also their main shareholders. We further demonstrate that the stocks of these firms have unique lottery-like characteristics, and that retail investors apparently trade in such stocks as if they were gambling on the market. Considering the price impact of this investor behavior we document that buying and holding such securities leads, on average, to a negative realized abnormal return of at least -28% over the 12-month post-announcement period, a result inconsistent with traditional asset pricing models. However, examining how arbitrageurs might exploit this apparent market pricing anomaly, we find they have little incentive to intervene in this particular market: implementation costs and risks are simply too high. We thus conclude that a combination of gambling-motivated trading by retail investors and limits to arbitrage seems to lead to the apparent market pricing paradox we document. Our paper thus provides a clear answer to Eugene Fama and Kenneth French’s recent question on their blog - “Bankrupt Firms: Who’s Buying?”.
Multiple natural experiments of large jackpot lotteries in Taiwan are used to document that some individual investors trade stocks as a form of gambling, whereby those investors substitute lottery gambling for stock trading. Our study accentuates the following findings. First, when the jackpot exceeds 500 million Taiwan dollars, the number of shares traded by individual investors decreases between 6% and 10% among stocks with high individual trading fraction, low market capitalization, high past returns, and high past turnover, and the effect is statistically significant. Second, the reduction in individual trading ranges between 5.4% and 7% among stocks with lottery features. Third, the magnitude of the decline increases monotonically with the jackpot size. Fourth, firm-level trading activity reacts negatively to large jackpots and is statistically significant for a sizable number of firms. Fifth, the aggregate trading activity by individual investors declines by about 5% on large jackpot days. Sixth, the substitution effect is preserved when the lottery sales and the size of the jackpot are employed as alternative instruments for gambling. Finally, the substitution effect is found to adversely affect the liquidity among certain types of stocks, while it fails to show up in the options market and in stock trading by institutional investors.
For 5,500 individual online investors we match survey records with recent trading data to investigate what they want, in terms of their stated objectives for investing, what they do, in terms of the broad investing strategies they employ, and how their portfolios perform in terms of risk, return, turnover, and diversification. Our results show that speculation is an important investment objective, and is related to a higher turnover of stocks and derivatives, as well as riskier returns. In contrast, while the proportion of individual online investors saving for retirement is relatively low, those who do have this as their objective display a lower turnover of stocks and hold less concentrated portfolios. Individual online investors rely strongly on technical analysis as an investing strategy, which goes hand in hand with a higher turnover of stocks and derivatives, more concentrated portfolios, lower returns, and higher risk. Finally, a large fraction of the individual online investors in our sample rely on their intuition as an investing strategy, which is associated with a higher turnover of stocks.
We exploit demographic variation to identify the effect of dividend demand on corporate payout policy. Retail investors tend to hold local stocks and older investors prefer dividend-paying stocks. Together, these tendencies generate geographically varying demand for dividends. Firms headquartered in areas in which seniors constitute a large fraction of the population are more likely to pay dividends, initiate dividends, and have higher dividend yields. We also provide indirect evidence as to why managers may respond to the demand for dividends from local seniors. Overall, these results are consistent with the notion that the investor base affects corporate policy choices.
ABSTRACTI find that economically meaningless index labels cause stock returns to covary in excess of fundamentals. S&P/Barra follow a simple mechanical procedure to define their Value and Growth indices. In doing so, they reclassify some stocks from Value to Growth even after their book-to-market ratios have risen, and vice versa. Such stocks begin to covary more with the index they join and less with the index they leave. Backdated constituent data from Barra reveal no such label-related shifts in comovement during the 10 years prior to the actual introduction of the indices in 1992.
This study shows that the propensity to gamble and investment decisions are correlated. At the aggregate level, individual investors prefer stocks with lottery features, and like lottery demand, the demand for lottery-type stocks increases during economic downturns. In the cross-section, socioeconomic factors that induce greater expenditure in lotteries are associated with greater investment in lottery-type stocks. Further, lottery investment levels are higher in regions with favorable lottery environments. Because lottery-type stocks underperform, gambling-related underperformance is greater among low-income investors who excessively overweight lottery-type stocks. These results indicate that state lotteries and lottery-type stocks attract very similar socioeconomic clienteles.
State-sponsored lotteries are a lucrative source of revenue. Despite their low payout rates, lotteries are extremely popular, particularly among low-income citizens. State officials laud the benefits of lottery proceeds and promote the fun and excitement of participation. This entertainment value is one explanation for lottery demand by the poor: individuals with lower incomes substitute lottery play for other entertainment. Alternatively, low-income consumers may view lotteries as a convenient and otherwise rare opportunity for radically improving their standard of living. Bad times may cause desperation, and the desperate may turn to lotteries in an effort to escape hardship. This study tests these competing explanations. We examine lottery sales data from 39 states over 10 years and find a strong and positive relationship between sales and poverty rates. In contrast, we find no relationship between movie ticket sales, another inexpensive form of entertainment, and poverty rates.
We construct a new data set of consumption and income data for the largest U.S. metropolitan areas, and we show that the extent of risk-sharing between regions varies substantially over time. In times when US housing collateral is scarce nationally, regional consumption is about twice as sensitive to income shocks. We also document higher sensitivity in regions with lower housing collateral. Household-level borrowing frictions can explain this new stylized fact. When the value of housing relative to human wealth falls, loan collateral shrinks, borrowing (risk-sharing) declines, and the sensitivity of consumption to income increases. Our model aggregates heterogeneous, borrowing-constrained households into regions characterized by a common housing market. The resulting regional consumption patterns quantitatively match those in the data. (Copyright: Elsevier)
Estimates of the cost of equity for industries are imprecise. Standard errors of more than 3.0% per year are typical for both the CAPM and the three-factor model of Fama and French (1993). These large standard errors are the result of(i) uncertainty about true factor risk premiums and (ii) imp ecise estimates of the loadings of industries on the risk factors. Estimates of the cost of equity for firms and projects are surely even less precise.
Building on Vijh (Rev. Financial Stud. 7 (1994)), we use additions to the S&P 500 to distinguish two views of return comovement: the traditional view, which attributes it to comovement in news about fundamental value, and an alternative view, in which frictions or sentiment delink it from fundamentals. After inclusion, a stock's beta with the S&P goes up. In bivariate regressions which control for the return of non-S&P stocks, the increase in S&P beta is even larger. These results are generally stronger in more recent data. Our findings cannot easily be explained by the fundamentals-based view and provide new evidence in support of the alternative friction- or sentiment-based view.
This paper uses investor-level data to provide direct evidence for an intuitive but surprisingly untested proposition that investors make larger investment mistakes when valuation uncertainty is higher and stocks are more difficult to value. Using multiple measures of valuation uncertainty and multiple behavioral bias proxies, I show that individual investors exhibit stronger behavioral biases when stocks are harder to value and when market-level uncertainty is higher. I also find that informed trading intensity is higher among stocks where individual investors exhibit stronger behavioral biases. Collectively, these results indicate that uncertainty at both stock and market levels amplifies individual investors behavioral biases and that relatively better informed investors attempt to exploit those biases.
We examine how corporate culture influences firm behavior. Prior research suggests a link between individual religiosity and risk aversion. We find that this relationship also influences organizational behavior. Firms located in counties with higher levels of religiosity display lower degrees of risk exposure, as measured by variances in equity returns or returns on assets. They exhibit a lower investment rate and less growth, but generate a more positive market reaction, when they announce new investments. Finally, chief executive officers are more likely to join a firm with a similar religious environment as in their previous firm when they switch employers.
The strong bias in favor of domestic securities is a well-documented characteristic of international investment portfolios, yet we show that the preference for investing close to home also applies to portfolios of domestic stocks. Specifically, U.S. investment managers exhibit a strong preference for locally headquartered firms, particularly small, highly levered firms that produce nontraded goods. These results suggest that asymmetric information between local and nonlocal investors may drive the preference for geographically proximate investments, and the relation between investment proximity and firm size and leverage may shed light on several well-documented asset pricing anomalies. Copyright The American Finance Association 1999.
This paper examines the proposition that fluctuations in discounts of closed-end funds are driven by changes in individual investor sentiment. The theory implies that discounts on various funds move together, that new funds get started when seasoned funds sell at a premium or a small discount, and that discounts are correlated with prices of other securities affected by the same investor sentiment. The evidence supports these predictions. In particular, the authors find that both closed-end funds and small stocks tend to be held by individual investors, and that the discounts on closed-end funds narrow when small stocks do well. Copyright 1991 by American Finance Association.
The 2008/9 financial crisis highlighted the importance of evaluating vulnerabilities owing to interconnectedness, or Too-Connected-to-Fail risk, among financial institutions for country monitoring, financial surveillance, investment analysis and risk management purposes. This paper illustrates the use of balance sheet-based network analysis to evaluate interconnectedness risk, under extreme adverse scenarios, in banking systems in mature and emerging market countries, and between individual banks in Chile, an advanced emerging market economy.
Using a sample free of survivor bias, the author demonstrates that common factors in stock returns and investment expenses almost completely explain persistence in equity mutual funds' mean and risk-adjusted returns. Darryll Hendricks, Jayendu Patel, and Richard Zeckhauser's (1993) 'hot hands' result is mostly driven by the one-year momentum effect of Narasimham Jegadeesh and Sheridan Titman (1993), but individual funds do not earn higher returns from following the momentum strategy in stocks. The only significant persistence not explained is concentrated in strong underperformance by the worst-return mutual funds. The results do not support the existence of skilled or informed mutual fund portfolio managers. Copyright 1997 by American Finance Association.
This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms. Specifically, we ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more developed financial markets. We find this to be true in a large sample of countries over the 1980s. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality. (JEL O4, F3, G1) A large literature, dating at least as far back as Joseph A. Schumpeter (1911), emphasizes the positive influence of the development of a country's financial sector on the level and the rate of growth of its per capita income. The argument essentially is that the services the financial sector provides -- of reallocating capital to the highest value use without substantial risk of loss through moral hazard, adverse ...