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What are the benefits of attracting gambling investors? Evidence from stock splits in China

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  • Hu, Conghui
  • Lin, Ji-Chai
  • Liu, Yu-Jane

Abstract

By analyzing a sample of Chinese firms that split their stocks via stock dividends and using proprietary trading data to measure investors' gambling preferences, we find that stock splits raise the stocks' lottery characteristics, making them attractive to gambling investors, who willingly pay higher prices for skewed securities and share firm risk with existing shareholders. Split firms take more risk. Our findings suggest that by attracting gambling investors, stock splits facilitate (large) shareholders to reduce wealth exposures to firm risk and increase the firms' risk-taking capacity. Furthermore, due to the influx of gambling investors and more risk-taking, split firms' return comovement with lottery-like stocks increases, while their market risk decreases, suggesting that stock splits induce fundamental changes to the firms' investor base and risk profile.

Suggested Citation

  • Hu, Conghui & Lin, Ji-Chai & Liu, Yu-Jane, 2022. "What are the benefits of attracting gambling investors? Evidence from stock splits in China," Journal of Corporate Finance, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:corfin:v:74:y:2022:i:c:s0929119922000426
    DOI: 10.1016/j.jcorpfin.2022.102199
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    More about this item

    Keywords

    Gambling preferences; Stock splits; Risk sharing; Return comovement;
    All these keywords.

    JEL classification:

    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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