Preference for lottery features in real estate investment trusts

Abstract

This paper provides strong and novel evidence of the preference among investors for lottery-like payoffs by documenting a strong intra-industry MAX effect in REITs. Specifically, REITs with high maximum daily returns (high MAX) over the past 1-month significantly underperform REITs with low maximum daily returns (low MAX) over the same period. Such underperformance is persistent in subsequent months, although the underperformance is significant only in several months. In general, high MAX REITs are smaller and exhibit lower prices and higher idiosyncratic volatility than other REITs. However, firm characteristics cannot explain the MAX effect among REITs. In contrast, the MAX effect could significantly explain the idiosyncratic volatility puzzle among REITs. Moreover, the MAX effect is more pronounced among REITs with low institutional ownerships, while investor sentiment has no significant effect on the MAX effect among REITs.