Attention, Social Interaction, and Investor Attraction to Lottery Stocks

Abstract

We test the hypothesis that retail investors' attraction to lottery stocks induces overvaluation, and is amplified by high attention and social interactions. The lottery premium (negative abnormal returns) is stronger for high-retail-ownership stocks—especially those that also have high analyst coverage, high latest absolute earnings surprises, or extreme recent positive returns. The premium is also larger for high-retail-ownership stocks headquartered in counties with high social interactions, proxied by headquarter population density or Facebook social connectivity. Google search activities in response to large extreme returns are also consistent with the role of attention in attracting investors to lottery stocks.

Keywords: Preference for lottery-like stocks, investor attention, social interactions, social network, MAX, skewness, retail investors

JEL Classification: G10, G11, G12, G14, C13, E20, E30