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Death and jackpot: Why do individual investors hold overpriced stocks?

2014; Elsevier BV; Volume: 113; Issue: 3 Linguagem: Inglês

10.1016/j.jfineco.2014.04.001

1879-2774

Jennifer Conrad, Nishad Kapadia, Yuhang Xing,

Corporate Finance and Governance

Campbell, Hilscher, and Szilagyi (2008) show that firms with a high probability of default have abnormally low average future returns. We show that firms with a high potential for default (death) also tend to have a relatively high probability of extremely large (jackpot) payoffs. Consistent with an investor preference for skewed, lottery-like payoffs, stocks with high predicted probabilities for jackpot returns earn abnormally low average returns. Stocks with high death or jackpot probabilities have relatively low institutional ownership and the jackpot effect we find is much stronger in stocks with high limits to arbitrage.