Returns On Lottery Stocks

Irrational investors in the market will have obvious preference behavior in the investment process,and the preference for speculation generally exists in China’s capital market.Lottery is one of the most typical legal speculation in social life.Existing studies also call people’s preference for speculative assets with low probability and high return as "gambling preference" or "lottery preference",and stocks with such characteristics in the stock market are also called "lottery stock".Behavioral finance explains people’s gambling preference from such aspects as people overestimate the possibility of occurrence of small probability events,give more weight to tail high returns and overconfidence,etc.In the financial field,more studies on lottery stocks explain investors’ gambling preference.China’s stock market is relatively low in maturity,high risk,serious speculative sentiment,and widespread gambling preference will largely affect the normal pricing of assets,the impact of investors’ irrational preference on asset pricing has become a hot issue in the field of modern finance research.In recent years,more and more studies have focused on the characteristics of lottery stocks and their returns,but most of them believe that they are overestimated and have low longterm returns.But in practice,investors’ preference for lottery stocks varies over time and market conditions,and is subject to shocks from specific events.There have been many studies on the anomaly of earnings announcement in the academic circle,most of which focus on the phenomenon of continuous price drift after the announcement,but some studies find that there is a lot of speculation in the market before the announcement.In addition,there are also studies showing that investor sentiment can influence people’s gambling preference.Therefore,this paper has a strong research value to explore the return anomaly of lottery stock before and after the earnings announcement,and help to improve the traditional investment strategy.Based on the above realistic background,through combing relevant literature,combining theoretical analysis and empirical test,this paper explores whether there is excess return between lottery stocks and non-lottery stocks in the current A-share market before and after earnings announcement,and whether investor sentiment will affect it.In this paper,the listed companies in the A-share market from the fourth quarter of 2009 to the first quarter of 2020 are selected as the research samples to measure the lottery attributes of stocks by selecting three indicators,such as trait skewness,stock price and trait volatility,and to test their excess returns before and after earnings announcements by forming hedging portfolios in groups.The FamaMacbeth regression tests the significant correlation between the lottery attributes of stocks and this excess return,and the grouped multiple regression tests the influence of investor sentiment on this excess return caused by gambling preference.The empirical results of this paper show that:(1)The lottery hedging portfolios grouped according to the three lottery stock metrics had significant excess returns before the earnings announcement,and the excess returns declined significantly after the earnings announcement.The results show that the excess return is specific to the earnings announcement day by comparing with the pseudo announcement day randomly selected according to certain principles.(2)After controlling for a series of inherent corporate characteristics,the lottery property of the stock has a significant positive effect on the excess return before the earnings announcement,but this effect becomes insignificant after the earnings announcement.(3)Investor sentiment in the market does affect the gambling preference before earnings announcement.Compared with the period of low mood,in the period of high investor sentiment,the excess returns of stocks before earnings announcement are more significantly positively correlated with their lottery characteristics.The possible contributions of the research results of this paper are as follows:First,people’s gambling preference is not constant,and the existence of excess returns of lottery-type stocks in specific event periods is found.It provides A novel direction for further research on lottery stocks in A stock market.Second,improving our investment strategy to be long lottery stocks during this particular time period before earnings announcements could improve the returns of our portfolio.