Time-varying MAX preference: Evidence from revenue announcements

Abstract

In this study, I examine whether investors' demand for stocks with maximum daily returns (MAX stocks) increases before the firms' revenue announcements. My setting is the Taiwan stock market in which listed firms are uniquely required to declare their previous month's revenues. I find that investors' preference for MAX stocks is stronger prior to revenue announcements, causing high MAX stocks to outperform low MAX stocks in the pre-announcement window. The MAX spread remains significant even after accounting for institutional ownership, past returns, and investor attention. Although the desire for MAX stocks is the main driver behind the higher returns for high MAX stocks before revenue announcements, investor attention amplifies this gambling tendency. Prior to revenue announcements, investors prefer those MAX stocks whose prices are far from their 52-week highs. By contrast, this phenomenon does not exist when stock prices are close to the 52-week high.