Abstract

http://ssrn.com/abstract=1733225
 
 

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Do Investors Overpay for Stocks with Lottery-Like Payoffs? An Examination of the Returns on OTC Stocks


Bjorn Eraker


University of Wisconsin - Madison - Department of Finance, Investment and Banking

Mark J. Ready


University of Wisconsin - Madison - Department of Finance, Investment and Banking

November 26, 2013


Abstract:     
We study returns on stocks trading in the Over-the-Counter markets (including the OTCBB and Pink Sheets) in the US. Using a sample of more than eleven thousand OTC companies, we document substantial negative average rates of return on companies trading in these markets. Using different sample selection criteria, we document average total returns (from the first to last price observation) of about negative forty percent. The returns on OTC stocks are significantly negative after controlling for standard risk factors. Since standard models fail to explain the large negative returns, we investigate whether they can be explained by the behavioral model of Barberis and Huang (2008). We find that this model can generate large negative returns for parameter values that imply that investors willingly distort the underlying probability of success by a large amount.

Number of Pages in PDF File: 53

Keywords: over-the-counter, OTC, pink sheets, skew, skewness, lottery, prospect theory, return anomalies, rational pricing, behavioral finance

JEL Classification: G10, G20, G38

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Date posted: January 1, 2011 ; Last revised: November 27, 2013

Suggested Citation

Eraker, Bjorn and Ready, Mark J., Do Investors Overpay for Stocks with Lottery-Like Payoffs? An Examination of the Returns on OTC Stocks (November 26, 2013). Available at SSRN: http://ssrn.com/abstract=1733225 or http://dx.doi.org/10.2139/ssrn.1733225

Contact Information

Bjorn Eraker (Contact Author)
University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )
975 University Avenue
Madison, WI 53706
United States
Mark J. Ready
University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )
975 University Avenue
Madison, WI 53706
United States
608-262-5226 (Phone)
608-263-0477 (Fax)
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