Hostname: page-component-78c5997874-8bhkd Total loading time: 0 Render date: 2024-11-15T10:55:54.981Z Has data issue: false hasContentIssue false
  • English
  • Français

Searching for Gambles: Gambling Sentiment and Stock Market Outcomes

Published online by Cambridge University Press:  01 July 2020

Yao Chen ,
Alok Kumar Open the ORCID record for Alok Kumar [Opens in a new window]  and
Chendi Zhang
Yao Chen
Affiliation:
University of Exeter Business Schooly.chen5@exeter.ac.uk
Alok Kumar*
Affiliation:
University of Miami
Chendi Zhang
Affiliation:
University of Exeter Business Schoolc.zhang@exeter.ac.uk
*
akumar@miami.edu (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

Using Internet search volume for lottery to capture gambling sentiment shifts, we show that when the overall gambling sentiment is strong, investor demand for lottery stocks increases, these stocks earn positive short-run abnormal returns, managers are more likely to split stocks to cater to the increased demand for low-priced lottery stocks, and initial public offerings (IPOs) earn higher first day returns. Further, the sentiment-return relation is stronger among low institutional ownership firms, headquartered in regions where gambling is more acceptable and local bias is stronger. These results suggest that gambling sentiment has a spillover effect on the stock market.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 6 , September 2021 , pp. 2010 - 2038
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank an anonymous referee, Jawad Addoum, Nick Barberis, Hendrik Bessembinder (the editor), Linquan Chen, Zhi Da, Daniel Dorn (the referee), Marc Goergen, Roman Kozhan, Jinfei Sheng, Richard Taffler, Jeff Wurgler, and seminar participants at the 2016 China International Conference in Finance, 2016 FMA Annual Meeting, 2016 EFMA Annual Meeting, 2019 Exeter Prize Workshop, Cardiff University, University of Exeter, University of Miami, University of Surrey, and University of Warwick for helpful comments and suggestions. All remaining errors and omissions are ours.

References

Angel, J. J. “Tick Size, Share Prices, and Stock Splits.” Journal of Finance, 52 (1997), 655–681.CrossRefGoogle Scholar
Baker, M.; Greenwood, R.; and Wurgler, J.. “Catering through Nominal Share Prices.” Journal of Finance, 64 (2009), 2559–2590.CrossRefGoogle Scholar
Baker, H. K., and Powell, G. E.. “Why Companies Issue Stock Splits.” Financial Management, 21 (1992), 11.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “Investor Sentiment in the Stock Market.” Journal of Economic Perspectives, 21 (2007), 129–152.CrossRefGoogle Scholar
Bali, T. G.; Cakici, N.; and Whitelaw, R. F.. “Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns.” Journal of Financial Economics, 99 (2011), 427–446.CrossRefGoogle Scholar
Barber, B. M., and Odean, T.. “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors.” Journal of Finance, 55 (2000), 773–806.CrossRefGoogle Scholar
Barber, B. M., and Odean, T.. “All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors.” Review of Financial Studies, 21 (2008), 785–818.CrossRefGoogle Scholar
Barberis, N., and Huang, M.. “Stocks as Lotteries: The Implications of Probability Weighting for Security Prices.” American Economic Review, 98 (2008), 2066–2100.CrossRefGoogle Scholar
Beenstock, M., and Haitovsky, Y.. “Lottomania and Other Anomalies in the Market for Lotto.” Journal of Economic Psychology, 22 (2001), 721–744.CrossRefGoogle Scholar
Bjork, J. M.; Knutson, B.; Fong, G. W.; Caggiano, D. M.; Bennett, S. M.; and Hommer, D. W.. “Incentive-Elicited Brain Activation in Adolescents: Similarities and Differences from Young Adults.” Journal of Neuroscience, 24 (2004), 1793–1802.CrossRefGoogle ScholarPubMed
Brunnermeier, M. K.; Gollier, C.; and Parker, J. A.. “Optimal Beliefs, Asset Prices, and the Preference for Skewed Returns.” American Economic Review, 97 (2007), 159–165.CrossRefGoogle Scholar
Calcagno, P.; Walker, D.; and Jackson, J.. “Determinants of the Probability and Timing of Commercial Casino Legalization in the United States.” Public Choice, 142 (2010), 69–90.CrossRefGoogle Scholar
Campbell, J. Y.; Hilscher, J.; and Szilagyi, J.. “In Search of Distress Risk.” Journal of Finance, 63 (2008), 2899–2939.CrossRefGoogle Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance 52 (1997), 57–82.CrossRefGoogle Scholar
Coval, J. D., and Moskowitz, T. J.. “Home Bias at Home: Local Equity Preference in Domestic Portfolios.” Journal of Finance, 54 (1999), 2045–2073.CrossRefGoogle Scholar
Coval, J. D., and Moskowitz, T. J.. “The Geography of Investment: Informed Trading and Asset Prices.” Journal of Political Economy, 109 (2001), 811–841.CrossRefGoogle Scholar
Creigh-Tyte, S., and Farrell, L.. 2003. “Is the UK National Lottery Experiencing Lottery Fatigue?” In The Economics of Gambling, Williams, L.V., ed. London: Routledge, 165–181.Google Scholar
Da, Z.; Engelberg, J.; and Gao, P.. “In Search of Attention.” Journal of Finance, 66 (2011), 1461–1499.CrossRefGoogle Scholar
Da, Z.; Engelberg, J.; and Gao, P.. “The Sum of All FEARS Investor Sentiment and Asset Prices.” Review of Financial Studies, 28 (2015), 1–32.CrossRefGoogle Scholar
Daniel, K.; Hirshleifer, D.; and Sun, L.. “Short- and Long-Horizon Behavioral Factors.” Review of Financial Studies, 33 (2020), 1673–1736 (https://academic.oup.com/rfs/article/33/4/1673/5522378).CrossRefGoogle Scholar
Doran, J. S.; Jiang, D.; and Peterson, D. R.. “Gambling Preference and the New Year Effect of Assets with Lottery Features.” Review of Finance, 16 (2012), 685–731.CrossRefGoogle Scholar
Dorn, A.; Dorn, D.; and Sengmueller, P.. “Trading as Gambling.” Management Science, 61 (2014), 2376–2393.CrossRefGoogle Scholar
Dorn, D., and Sengmueller, P.. “Trading as Entertainment?” Management Science, 55 (2009), 591–603.CrossRefGoogle Scholar
Dyl, E. A., and Elliott, W. B.. “The Share Price Puzzle.” Journal of Business, 79 (2006), 2045–2066.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “A Five-Factor Asset Pricing Model.” Journal of Financial Economics, 116 (2015), 1–22.CrossRefGoogle Scholar
Ferreira, M. A., and Matos, P.. “The Colors of Investors’ Money: The Role of Institutional Investors around the World.” Journal of Financial Economics, 88 (2008), 499–533.CrossRefGoogle Scholar
Gao, X., and Lin, T.-C.. “Do Individual Investors Treat Trading as a Fun and Exciting Gambling Activity? Evidence from Repeated Natural Experiments.” Review of Financial Studies, 28 (2014), 2128–2166.CrossRefGoogle Scholar
Green, T. C., and Hwang, B.-H.. “Initial Public Offerings as Lotteries: Skewness Preference and First-Day Returns.” Management Science, 58 (2012), 432–444.CrossRefGoogle Scholar
Grinblatt, M., and Keloharju, M.. “How Distance, Language, and Culture Influence Stockholdings and Trades.” Journal of Finance, 56 (2001), 1053–1073.CrossRefGoogle Scholar
Grinblatt, M., and Keloharju, M.. “Sensation Seeking, Overconfidence, and Trading Activity.” Journal of Finance, 64 (2009), 549–578.CrossRefGoogle Scholar
Harvey, C. R., and Siddique, A.. “Conditional Skewness in Asset Pricing Tests.” Journal of Finance, 55 (2000), 1263–1295.CrossRefGoogle Scholar
Hong, H.; Kubik, J. D.; and Stein, J. C.. “The Only Game in Town: Stock-Price Consequences of Local Bias.” Journal of Financial Economics, 90 (2008), 20–37.CrossRefGoogle Scholar
Hong, H.; Scheinkman, J.; and Xiong, W.. “Asset Float and Speculative Bubbles.” Journal of Finance, 61 (2006), 1073–1117.CrossRefGoogle Scholar
Hou, K., and Moskowitz, T. J.. “Market Frictions, Price Delay, and the Cross-Section of Expected Returns.” Review of Financial Studies, 18 (2005), 981–1020.CrossRefGoogle Scholar
Ibbotson, R. G.; Sindelar, J. L.; and Ritter, J. R.. “The Market’s Problems with the Pricing of Initial Public Offerings.” Journal of Applied Corporate Finance, 7 (1994), 66–74.CrossRefGoogle Scholar
Kearney, M. S. “State Lotteries and Consumer Behavior.” Journal of Public Economics, 89 (2005), 2269–2299.CrossRefGoogle Scholar
Kluger, A. N., and DeNisi, A.. “The Effects of Feedback Interventions on Performance: A Historical Review, a Meta-Analysis, and a Preliminary Feedback Intervention Theory.” Psychological Bulletin, 119 (1996), 254.CrossRefGoogle Scholar
Korniotis, G. M., and Kumar, A.. “State-Level Business Cycles and Local Return Predictability.” Journal of Finance, 68 (2013), 1037–1096.CrossRefGoogle Scholar
Kuhnen, C. M., and Knutson, B.. “The Influence of Affect on Beliefs, Preferences, and Financial Decisions.” Journal of Financial and Quantitative Analysis, 46 (2011), 605–626.CrossRefGoogle Scholar
Kumar, A. “Who Gambles in the Stock Market?” Journal of Finance, 64 (2009), 1889–1933.CrossRefGoogle Scholar
Kumar, A., and Lee, C. M. C.. “Retail Investor Sentiment and Return Comovements.” Journal of Finance, 61 (2006), 2451–2486.CrossRefGoogle Scholar
Kumar, A.; Page, J. K.; and Spalt, O. G.. “Religious Beliefs, Gambling Attitudes, and Financial Market Outcomes.” Journal of Financial Economics, 102 (2011), 671–708.CrossRefGoogle Scholar
Kumar, A.; Page, J. K.; and Spalt, O. G.. “Gambling and Comovement.” Journal of Financial and Quantitative Analysis, 51 (2016), 85–111.CrossRefGoogle Scholar
Lakonishok, J., and Lev, B.. “Stock Splits and Stock Dividends: Why, Who, and When.” Journal of Finance, 42 (1987), 913–932.CrossRefGoogle Scholar
Lee, C. M. C., and Ready, M. J.. “Inferring Trade Direction from Intraday Data.” Journal of Finance, 46 (1991), 733–746.CrossRefGoogle Scholar
Liao, C. “Risk Taking Begets Risk Taking: Evidence from Casino Openings and Investor Portfolios.” Working Paper, University of Manitoba (2017).Google Scholar
Lin, J.-C.; Singh, A. K.; and Yu, W.. “Stock Splits, Trading Continuity, and the Cost of Equity Capital.” Journal of Financial Economics, 93 (2009), 474–489.CrossRefGoogle Scholar
Loughran, T., and Ritter, J.. “Why Has IPO Underpricing Changed over Time?” Financial Management, 33 (2004), 5–37.Google Scholar
Macey, J.; O’Hara, M.; and Pompilio, D.. “Down and Out in the Stock Market: The Law and Economics of the Delisting Process.” Journal of Law and Economics, 51 (2008), 683–713.CrossRefGoogle Scholar
Matheson, V., and Grote, K.. “Rationality and Efficiency in Lotto Games.” In Information Efficiency in Financial and Betting Markets, Williams, L.V., ed. Cambridge, UK: Cambridge University Press (2005), 313–329.CrossRefGoogle Scholar
Matheson, V., and Grote, K.. “Examining the ‘Halo Effect’ in Lotto Games.” Applied Economic Letters, 14 (2007), 307–310.Google Scholar
Minnick, K., and Raman, K.. “Why are Stock Splits Declining?” Financial Management, 43 (2014), 29–60.CrossRefGoogle Scholar
Mitton, T., and Vorkink, K.. “Equilibrium Underdiversification and the Preference for Skewness.” Review of Financial Studies, 20 (2007), 1255–1288.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–08.CrossRefGoogle Scholar
Odean, T. “Do Investors Trade Too Much?” American Economic Review, 89 (1999), 1279–1298.CrossRefGoogle Scholar
Palomino, F.; Renneboog, L.; and Zhang, C.. “Information Salience, Investor Sentiment, and Stock Returns: The Case of British Soccer Betting.” Journal of Corporate Finance, 15 (2009), 368–387.CrossRefGoogle Scholar
Scheinkman, J. A., and Xiong, W.. “Overconfidence and Speculative Bubbles.” Journal of Political Economy, 111 (2003), 1183–1220.CrossRefGoogle Scholar
Scott, F., and Garen, J.. “Probability of Purchase, Amount of Purchase, and the Demographic Incidence of the Lottery Tax.” Journal of Public Economics, 54 (1994), 121–143.CrossRefGoogle Scholar
Seasholes, M. S., and Zhu, N.. “Individual Investors and Local Bias.” Journal of Finance, 65 (2010), 1987–2010.CrossRefGoogle Scholar
Shefrin, H., and Statman, M.. “Behavioral Portfolio Theory.” Journal of Financial and Quantitative Analysis, 35 (2000), 127–151.CrossRefGoogle Scholar
Stambaugh, R. F., and Yuan, Y.. “Mispricing Factors.” Review of Financial Studies, 30 (2017), 1270–1315.CrossRefGoogle Scholar
Weld, W. C.; Michaely, R.; Thaler, R. H.; and Benartzi, S.. “The Nominal Share Price Puzzle.” Journal of Economic Perspectives, 23 (2009), 121–42.CrossRefGoogle Scholar
Williams, L. V., and Siegel, D. S.. The Oxford Handbook of the Economics of Gambling. Oxford, UK: Oxford University Press (2013).CrossRefGoogle Scholar
Woolridge, J. R., and Chambers, D. R.. “Reverse Splits and Shareholder Wealth.” Financial Management, 12 (1983), 5–15.CrossRefGoogle Scholar
Supplementary material: PDF

Chen et al. supplementary material

Internet Appendix

Download Chen et al. supplementary material(PDF)
PDF 301 KB