Do Individual Investors Trade Stocks as Gambling? Evidence from Repeated Natural Experiments

47 Pages Posted: 21 Aug 2011 Last revised: 19 Jan 2012

See all articles by Xiaohui Gao

Xiaohui Gao

Fox School of Business, Temple University

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Date Written: August 20, 2011

Abstract

Multiple natural experiments of large jackpot lotteries in Taiwan are used to document that some individual investors trade stocks as a form of gambling, whereby those investors substitute lottery gambling for stock trading. Our study accentuates the following findings. First, when the jackpot exceeds 500 million Taiwan dollars, the number of shares traded by individual investors decreases between 6% and 10% among stocks with high individual trading fraction, low market capitalization, high past returns, and high past turnover, and the effect is statistically significant. Second, the reduction in individual trading ranges between 5.4% and 7% among stocks with lottery features. Third, the magnitude of the decline increases monotonically with the jackpot size. Fourth, firm-level trading activity reacts negatively to large jackpots and is statistically significant for a sizable number of firms. Fifth, the aggregate trading activity by individual investors declines by about 5% on large jackpot days. Sixth, the substitution effect is preserved when the lottery sales and the size of the jackpot are employed as alternative instruments for gambling. Finally, the substitution effect is found to adversely affect the liquidity among certain types of stocks, while it fails to show up in the options market and in stock trading by institutional investors.

Keywords: Gambling desire, lottery, substitution effect, trading by individual investors, lottery stocks

JEL Classification: G10, G12, G13, C51

Suggested Citation

Gao, Xiaohui and Lin, Tse-Chun, Do Individual Investors Trade Stocks as Gambling? Evidence from Repeated Natural Experiments (August 20, 2011). Available at SSRN: https://ssrn.com/abstract=1913247 or http://dx.doi.org/10.2139/ssrn.1913247

Xiaohui Gao (Contact Author)

Fox School of Business, Temple University ( email )

Alter Hall 421
Philadelphia, PA 19122
United States

HOME PAGE: http://https://sites.google.com/site/xiaohuigaobakshi/

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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