Lottery-type stocks and corporate strategies at the turn of the month

Abstract

We show that retail investors’ cyclical demand for lottery stocks, which tends to peak at the turn-of-the-month (ToM), has implications for firms’ financial activities. Consistent with the notion that the peak in demand is driven by a propensity to gamble that is associated with inattention, we find underreaction to earnings news issued at the ToM by lottery-type firms located in areas with many gambling investors. Lottery-type firms are more likely to issue bad earnings news at ToM, thus benefiting from a less negative price reaction. Similarly, seasoned equity offerings (SEOs) by lottery-type firms are often strategically timed at the ToM, conceivably to take advantage of local retail investors’ underreaction and thereby temper the typically negative immediate stock price reaction to the issuance news. Further suggestive of strategic exploitation of local investors peak in demand at the ToM period, lottery-type firms’ SEOs at the ToM are also more likely to be offered via an accelerated method that saves the direct marketing costs associated with other offer methods.