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

April 3, 2014

Journal of Financial Economics (JFE), Forthcoming

Abstract:     
We study returns on Over-The-Counter stocks and we find these returns are extremely negative on average. The distribution of OTC stock returns is highly positively-skewed: while many of the stocks in our sample become worthless, a few do extremely well. We investigate whether this negative return premium can be rationalized by investors' preference for positively-skewed payoffs. We show that the equilibrium model of Barberis and Huang (2008) provides a plausible explanation for the negative returns. We also show that OTC stocks that once traded on the regular exchanges perform much better than stocks that originate in the OTC markets.

Number of Pages in PDF File: 56

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: July 21, 2014

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 (April 3, 2014). Journal of Financial Economics (JFE), Forthcoming. 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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