Time-Varying Demand for Lottery: Speculation Ahead of Earnings Announcements*

Existing studies find that compared to non-lottery stocks, lottery-like stocks tend to be overpriced and earn lower subsequent returns, probably due to investor preferences for lottery-like assets. We argue that investor preferences for holding speculative assets are more pronounced ahead of firms’ earnings announcements, probably due to lower inventory costs and immediate payoffs. We show that there is indeed stronger demand for lottery-like stocks ahead of earnings announcements, leading to a price run-up for these stocks. In sharp contrast to the standard underperformance of lottery-like stocks, we find that lottery-like stocks outperform non-lottery stocks by about 52 basis points in the 5-day window ahead of earnings announcements. However, this return spread is reversed by 75 basis points within five days after the announcements. Moreover, this inverted-V shaped pattern on cumulative return spreads is more pronounced among firms with more retail order imbalance, with low institutional ownership, and in regions with stronger gambling propensity. JEL Classification: G02, G12, G14