Abstract
We provide a simple method to track firm-specific investor gambling intensity based on the publicly available transaction data. This identification approach effectively incorporates information on what and how much to buy in the trading decision of an investor with a gambling preference. With empirical analysis based on data of the Chinese stock market from January 2003 to May 2021, we document that investor gambling intensity is strongly persistent and significantly predicts future stock returns, which is not a rediscovery of the well-known lottery effect. Stocks with high aggregate gambling intensity underperform stocks with low aggregate gambling intensity by approximately 117 basis points over the following month. Several potential explanations for such empirical findings are examined, and we document support for the explanation based on information diffusion.
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