Abstract
This paper shows investors’ preference for right-skewed, lottery-like payoffs can eliminate price underreaction to extremely good earnings news. Such news enhance investors’ preference for lottery-like stocks, leading to preference-based trades that accelerate price adjustments. We find PEAD disappears for stocks with strong ex ante lottery-like features and extremely good earnings news. Arbitrage does not explain this finding because it persists when arbitrage costs and information asymmetry are high. Corroborating the disappearance of PEAD, the above stocks also experience greater price reactions to earnings news. Consistent with the prevalence of lottery preference among individual investors, we find they purchase more lottery-like stocks upon extremely good earnings news and the attenuation of PEAD is concentrated in stocks with greater net-buys by them around earnings announcements.
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
