Attention, Social Interaction, and Investor Attraction to Lottery Stocks

Abstract

We find that among stocks dominated by retail investors, the lottery anomaly is amplified by high investor attention (proxied by high analyst coverage, salient earnings surprises, or recency of extreme positive returns) and intense social interactions (proxied by Facebook social connectedness or population density near firm headquarters). Such stocks' lottery features attract greater Google search volume and retail net buying, followed by more negative earnings surprises and lower announcement-period returns. The findings provide insight into the roles of attention and social interaction in securities markets, and support the hypothesis that these forces contribute to investor attraction to lottery stocks.

Financial recommendations on Reddit, stock returns and cumulative prospect theory

“…Furthermore, the pattern of alphas is consistent with attention-based trading. Therefore, our results to some extent support the conclusion of Bali et al ( 2021 ) that attention and social interactions contribute to investors’ attraction to lottery-like stocks. Furthermore, our results are in line with Hu and Yan ( 2022 ) who find that social media attention drives retail investor trading activity, and that social media attention is informative.…”

“…Their model predicts alphas that are consistent with the majority of 23 prominent anomalies, which indicates that CPT is a promising framework to study investor behavior. Recently, Bali et al ( 2021 ) show that high investor attention and intense social interaction amplify the lottery anomaly among stocks dominated by retail investors. They conclude that attention and social interaction contribute to investors’ attraction to lottery-like stocks.…”

Commodity network and predictable returns

“…Instead, investors tend to hold those attention‐grabbing commodities. This finding is consistent with more recent evidence by Bali et al (2021) and Barber et al (2022) that irrational investors tend to hold attention‐grabbing assets for speculative purposes. As a result, lottery preference and speculative demand play important roles to understand the predictive relation.…”

Why Do Mutual Funds Hold Lottery Stocks?

“…The second measure, TOP10_MAX HOLD , is the holdingweighted average lotteryness, again as measured by MAX, for the top 10 stocks held by funds. The third measure, LTRY, is a composite index of lotteryness following Kumar (2009) and Bali, Hirshleifer, Peng, and Tang (2019) who define lottery stocks as those with low-price, high idiosyncratic volatility, and high idiosyncratic skewness. The correlations between MAX HOLD and MAX5 HOLD and other lottery holding proxies are high, ranging between 0.81 and 0.87.…”