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Market-Based Solutions to Vital Economic Issues
Research
Sep 1, 2014

Death or Jackpot: Why Do Individual Investors Hold Overpriced Stocks?

Abstract

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.

Note: Research papers posted on ResearchGate, including any findings, may differ from the final version chosen for publication in academic journals.


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