Motivated by the recent evidence of investors' preference for stocks with lottery- type payoffs documented on the U.S. stock markets, I investigate preferences for stocks that appear to be like lotteries in Europe. Across 14 markets, lottery- type stocks, characterized by high idiosyncratic skewness, high idiosyncratic volatility and low price, underperform and exhibit a "lottery premium". Fur- thermore, preferences for lottery-type stocks can help to explain the puzzling negative relation between past idiosyncratic volatility and returns, which does not persist after controlling for past extreme positive returns. Examining the relation between national revenues from gambling and "lottery premium" I find that countries featuring higher gambling revenues also exhibit a higher "lottery premium". Overall, the results indicate that lottery preferences might impact investment decisions and stock prices. JEL Classification G11, G12 Keywords gambling, lottery-type stocks, idiosyncratic volatility, maximum returns Author's e-mail p.vokata@gmail.com Supervisor's e-mail novakji@fsv.cuni.cz

In the first essay titled “Monthly Cyclicality in Retail Investors’ Liquidity and Lottery-type Stocks at the Turn of the Month”, we find that the well-documented underperformance of lottery stocks masks a within-month cyclical pattern. Demand for lottery stocks increases at the turn of the month especially in areas whose demographic profile resembles that of the typical lottery-ticket buyers (i.e., gamblers) driving their prices higher at the turn of the month. This effect is particularly pronounced among firms located in areas whose demographic profile resembles that of the typical lottery-ticket buyer and propelled by the within-month cyclicality of local investors’ personal liquidity positions. A long-short investment strategy based on this cyclical pattern of lottery stocks performance yields gross abnormal returns of about 15% per year. In the second essay titled “Lottery-type Stocks and Corporate Strategies at the Turn of the Month”, we test whether cyclical demand for lottery stocks by retail investors, that tends to peak at the turn-of-the-month (ToM), affects firms’ financial activities. Consistent with the notion that the peak in demand is driven by a propensity to gamble and is associated with inattention, we find underreaction to earnings news issued at the ToM by lottery-type firms located in areas with many gambling investors. We also find that the ToM also provides a window of opportunity for SEO issuing lottery-type firms. Such issuing firms may strategically choose to issue lottery-type stocks at the ToM to save the direct marketing costs because it flattens the elasticity of pre-offer demand curve.

Submitted by Eduardo Igreja (eduigreja@gmail.com) on 2018-04-12T17:45:03Z No. of bitstreams: 1 Qual é o preço da ação-loteria - Eduardo Igreja.pdf: 724444 bytes, checksum: bcda476394ddd2f0ba0080acd3f680b1 (MD5) / Approved for entry into archive by Maria Almeida (maria.socorro@fgv.br) on 2018-04-12T19:08:13Z (GMT) No. of bitstreams: 1 Qual é o preço da ação-loteria - Eduardo Igreja.pdf: 724444 bytes, checksum: bcda476394ddd2f0ba0080acd3f680b1 (MD5) / Made available in DSpace on 2018-04-12T19:09:13Z (GMT). No. of bitstreams: 1 Qual é o preço da ação-loteria - Eduardo Igreja.pdf: 724444 bytes, checksum: bcda476394ddd2f0ba0080acd3f680b1 (MD5) Previous issue date: 2017-12-19 / A lottery-type stock is a stock that presents a small probability of achieving a big positive return. If investors have utility functions based on Kahneman and Tversky’s Prospect Theory, they overestimate low probabilities. Other behavioral bias may occur when investors, analyzing data sample in retrospective, use peak-end rule, focusing their attention in the maximum point (PEAK) and at the end of sample (end). Sell the first quartile of stocks ranked by PEAK of daily returns in the last month (the 25% which had the higher PEAKS) and buy the last quartile of stocks (the 25% which had the lower PEAKS) is a profitable strategy with statistical significance (t-statistic of 2,38) in the 2000-2017 data sample of Brazilian stock market. These findings are not explained by 3-factor model of Fama-French (6,5% alpha), momentum, skewness, volatility, or traditional value-indicators, such as price-to-earnings and book-tomarket ratio / Ação-loteria é definida como uma ação que apresenta uma pequena probabilidade de alcançar um grande retorno positivo. Se os investidores possuem função utilidade segundo a Teoria da Perspectiva (Prospect Theory) de Kahneman e Tversky (1979), estes investidores sobre-estimam pequenas probabilidades. Outro viés comportamental pode ocorrer quando investidores, ao analisarem em retrospecto um período de dados, utilizam a heurística do pico-fim, concentrando-se nos momentos de máxima magnitude (PICO) e no final da amostra (fim). Vender o primeiro quartil de ações ordenadas por PICO de retorno diário no mês anterior (as 25% que obtiveram os maiores PICOS) e comprar o último quartil (as 25% com menores PICOS) é uma estratégia com ganhos estatisticamente significantes (t-estatístico de 2,38) no período de 2000 a 2017 no mercado de ações brasileiro. Os resultados não são explicados pelo modelo de Três Fatores de Fama-French (alfa de 6,5% ao ano), momento, assimetria, volatilidade, ou múltiplos tradicionalmente associados a valor, como razão lucro-preço e preço-valor patrimonial.

Tidigare studier i USA har påvisat ett positivt samband mellan individuella investerare som köper lotter och deras benägenhet att köpa aktier med liknande karaktärsdrag. Enligt klassisk finansteori bör inte individuella investerare äga så kallade lotteriaktier då de tenderar att generera negativ avkastning – trots detta äger många individuella investerare lotteriaktier. I denna studie undersöker vi om detta samband kan förklaras med hjälp av socioekonomiska faktorer som arbetslöshet, utbildningsnivå och spelutgifter på länsnivå. Studien behandlar uteslutande svenska data för socioekonomiska faktorer som utgörs av Sveriges befolkning, aktiedata som utgörs av dagliga stängningspriser för samtliga marknadsnoterade aktiebolag, och aktieägardata för samtliga marknadsnoterade aktiebolag som utgörs av svenska individuella investerare. Vidare är samtliga data insamlade från legitima datakällor för perioden 2012–2015. För att möjliggöra undersökandet av vilka individer som äger lotteriaktier väljer vi att definiera lotteriaktier i enlighet med tidigare studier, där lotteriaktier definieras som aktier med lågt pris, hög idiosynkratisk volatilitet och hög idiosynkratisk skevhet. Dessa egenskaper har visat sig attrahera riskbenägna investerare trots sin låga sannolikhet till hög vinst. Studien utgår från teorier inom behavioral finance där individers irrationella beslutsfattanden belyses. Teorier som prospect theory och cumulative prospect theory förklarar hur individer värderar vinster och förluster olika, samt hur individer tenderar att överskatta små sannolikheter och underskatta stora sannolikheter. Dessa teorier skapar ökad förståelse för varför individer agerar som de gör vid beslutsfattanden på finansiella marknader. Dessa teorier ställs i kontrast mot klassiska finansteorier som förutsätter att individer är rationella, kalkylerande och inte påverkas av irrationellt beteende eller känslor. Studiens resultat visar att i de län där antingen spelutgifter per capita är höga eller spelutgifter per nettoinkomst är höga är även andelen lotteriaktier hög, vilket överensstämmer med tidigare forskning i USA. Det visar sig även att antalet lotteriaktieägare och deras portföljexponering mot lotteriaktier ökar kraftigt under perioden, samtidigt som antal aktieägare i Sverige hålls relativt konstant under perioden, vilket indikerar ökande irrationalitet bland svenska individuella investerare på svenska finansiella marknader. / In this thesis, we examine individual investors preferences for lottery-type stocks between January 2012 and December 2015. Lottery-type stocks have shown to have similar characteristics to state lotteries through its low price, high idiosyncratic volatility and high idiosyncratic skewness in previous studies. These characteristics attract risk-seeking investors who aim for a small chance to win big. In detail, we analyze if there is a relationship between socioeconomic factors like unemployment rate, education, gambling expenditures per capita, gambling expenditures per net income and the propensity to hold lottery-type stocks in the individual stock portfolio in Sweden. The analysis is based on aggregated data of Swedish counties and the study is unique in regard to the Swedish stock market. Our results show that there is a positive significant relationship between gambling expenditures per capita, gambling expenditures per net income and a higher proportion of lottery-type stocks in the individuals stock portfolio within a county. These results show that socioeconomic factors that induce greater expenditures in lotteries are associated with greater investments in lottery-type stocks. Finally, our findings contradict the efficient market hypothesis and could thus be a contribution to the field of behavioral finance.