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Lottery preferences and retail short selling

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  • Tsai, Chia-Fen
  • Chang, Jung-Hsien
  • Tsai, Feng-Tse

Abstract

Unlike developed countries, the prominent participants in the Taiwanese stock market are individual investors. This study found that retail short-sellers in Taiwan can predict stock prices and perform better with stocks held primarily by retail investors with a preference for lottery-like payoffs. Moreover, short-sellers make lower profits with stocks with lottery features in the absence of the uptick rule. The findings are robust when considering the effect of institutional short selling, alternative lottery-like measures such as retail trading activity, arbitrage risk, and distinct macroeconomic conditions. Overall, the results suggest that retail investors are not necessarily noise traders. Based on divergence-of-opinion theory (Miller, 1977), heterogeneous retail investors make trades due to their differences in sentiments. Meanwhile, retail short-sellers include professionals in profitmaking through short-selling by gauging the gambling propensity of general retail investors. Consequently, removing short-selling restrictions can increase the spillover effect of short-sellers' trading signals and help other retail investors move and adjust their investments in lottery-like stocks.

Suggested Citation

  • Tsai, Chia-Fen & Chang, Jung-Hsien & Tsai, Feng-Tse, 2021. "Lottery preferences and retail short selling," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:pacfin:v:68:y:2021:i:c:s0927538x21001189
    DOI: 10.1016/j.pacfin.2021.101611
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    More about this item

    Keywords

    Retail short-selling; Lottery-like stocks; Retail ownership; Short sale restrictions;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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