Is maximum daily return a lottery? Evidence from monthly revenue announcements

Using the modified maximum daily return measure (LHR) defined as the difference between upward limit-hitting rates and downward limit-hitting rates, our paper documents the higher LHR, the lower subsequent returns, i.e., the so-called modified MAX effect, in the Taiwan stock market. Since Taiwan stock market requires listed companies to report their revenues every month, we further investigate how the arrival of revenue news affects these lottery-like stocks. It is found that when the high LHR is associated with positive shocks from the monthly revenue announcement, the stock becomes significantly less appealing to individual investors. As individual investors’ order imbalances drop substantially after the revenue announcement period, the modified MAX effect is diminished. We also find monthly revenues announcements greatly dilute the importance of quarterly earnings announcements and, therefore, play the more important role in determining the modified MAX effect. Overall, our study suggests that more frequent and promptly financial information disclosures, such as monthly revenue reports, are critical to improving market efficiency and reducing behavioral bias.