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Lottery demand and the asset growth anomaly

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  • Lu, Jing
  • Yang, Nien-Tzu
  • Ho, Keng-Yu
  • Ko, Kuan-Cheng

Abstract

The negative relation between asset growth (AG) and future stock returns is particularly featured by the overvaluation of high AG stocks. We propose that such overvaluation is attributed to investors’ lottery demand toward stocks with high maximum daily returns (MAX), resulting in higher AG premium among high MAX stocks. Our empirical results confirm this prediction. Further evidence indicates that the impact of lottery preference on the AG anomaly is robust to several alternative explanations, including overinvestment, limits-to-arbitrage, and the q-theory. Our study provides a new insight into the understanding of the AG anomaly.

Suggested Citation

  • Lu, Jing & Yang, Nien-Tzu & Ho, Keng-Yu & Ko, Kuan-Cheng, 2022. "Lottery demand and the asset growth anomaly," Finance Research Letters, Elsevier, vol. 48(C).
    • Handle: RePEc:eee:finlet:v:48:y:2022:i:c:s1544612322002367
    DOI: 10.1016/j.frl.2022.102988
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    1. Nicolas Cofre & Magdalena Mosionek-Schweda, 2023. "A simulated electronic market with speculative behaviour and bubble formation," Papers 2311.12247, arXiv.org.

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    More about this item

    Keywords

    Asset growth; Lottery preferences; Lottery-like payoffs; Extreme returns;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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