Gambling Preference and IPO Premium

Abstract

This paper investigates the gambling preference of Chinese investors in the convertible bond (CB) market through a natural experiment—the 2018 amendment of Article 142 of the Company Law. Utilizing CB issuance data from 2016 to 2023 and employing a cohort difference-in-difference approach, we find that the legal revision reshapes investors expectations and adjusts their valuation of CBs. The IPO premiums of high-repurchase-expectation (HRE) CBs increase by 4% to 8% after the legal revision across various premium measures. This significant increase indicates the gambling preference of Chinese CB investors, who overweight the increased likelihood of extreme large returns and view the legal revision as a speculative opportunity. Furthermore, our study documents the escalating impact of legal revision, driven by the interaction between investors’ gambling preference, heterogeneous expectation and learning from prices.

Keywords: convertible bond, gambling preference, IPO premium, share repurchase, lotteries