Time-Varying Demand for Lottery: Speculation Ahead of Earnings Announcements

Abstract

Investor preferences for holding speculative assets are likely to be more pronounced ahead of firms' earnings announcements, probably because of lower inventory costs and immediate payoffs or because of enhanced investor attention. We show that the demand for lottery-like stocks is stronger ahead of earnings announcements, leading to a price run-up for these stocks. In sharp contrast to the standard underperformance of lottery-like stocks, lottery-like stocks outperform non-lottery stocks by about 52 basis points in the 5-day window ahead of earnings announcements. However, this return spread is reversed by 80 basis points in the 5-day window after the announcements. Moreover, this inverted-V-shaped pattern on cumulative return spreads is more pronounced among firms with a greater retail order imbalance, among firms with low institutional ownership, and in regions with a stronger gambling propensity, and it is also robust after controlling for past 12-month returns and various proxies for investor attention.