Institutional trading, investor sentiment, and lottery‐like stock preferences

Abstract

This paper explores the time-varying institutional investor preference for lottery-like stocks. On average, institutional investor holdings reflect an aversion to lottery-like stocks. However, I find that an institutions' aversion to lottery-like stocks is reduced when investor sentiment is low. Moreover, I find that during low sentiment periods, institutional investors have abnormally high trading profits in more positively skewed stocks. These results suggest that institutions reduce their aversion toward lottery-like stocks during low sentiment periods to profitably trade in lottery-like stocks.

Risk‐taking begets risk‐taking: Evidence from casino openings and investor portfolios

“…Second, this study contributes to the growing literature studying the relationship between gambling and financial decision‐making (e.g., Alldredge, 2020; Maung et al., 2020). Studies cross‐sectionally link gambling and sensation‐seeking to higher portfolio turnover (Dorn & Sengmueller, 2009; Grinblatt & Keloharju, 2009), a preference for lottery stocks (Doran et al., 2012; Kumar, 2009), and more active positions on household balance sheets (Li, 2012).…”

Investor gambling preferences and stock returns: evidence from the Shanghai A-share markets

“…Li et al (2018) showed that funds as a whole are averse to gambling, but the proportion of shares of lottery-type stocks held by funds varies widely, and some funds actually have a strong gambling preference. Alldredge (2020) found that institutional investors increase their exposure to lottery-type stocks during periods of low market sentiment to trade ahead of individual investors and profit from the subsequent rise in stock prices as market sentiment improves.…”

Disagreement between hedge funds and other institutional investors and the cross‐section of expected stock returns

“…Gompers and Metrick (2001) find that temporal demand shocks, rather than informed trading of institutional investors, positively predict future returns. More recently, whereas Lewellen (2011) shows that the aggregate institutional portfolio has overall performed poorly since 2000, Alldredge (2020) presents evidence that institutional investors generate abnormally high trading profits in lottery‐like stocks during low‐sentiment periods.…”