Social Interactions and Lottery Stock Mania

Abstract

We find that social interactions are associated with both  greater likelihood of a stock becoming more lottery-like and with greater investor overoptimism about the lottery characteristic. Heightened social media activity about a stock positively predicts the probability of an extreme daily price run-up, a lottery event.  Lottery event stocks subject to more intense social media discussions subsequently experience greater retail buying pressure—particularly from Robinhood users—followed by lower  returns.  Moreover, lottery stocks of firms in more  socially well-connected counties experience lower subsequent returns, and  stocks with stronger lottery features trigger greater buy contagion among households in connected counties. Our findings suggest that social interactions stimulate  investor excitement and asset price bubbles.

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