Do investors overpay for stocks with lottery-like payoffs? An examination of the returns of OTC stocks

Bjørn Eraker and Mark Ready

Journal of Financial Economics, 2015, vol. 115, issue 3, 486-504

Abstract: We study returns on over-the-counter stocks and find that these returns are extremely negative on average. The distribution of OTC stock returns is highly positively skewed: while many of the stocks in our sample become worthless, a few do extremely well. We investigate whether this negative return premium can be rationalized by investors׳ preference for positively skewed payoffs. We show that the equilibrium model of Barberis and Huang (2008) provides a plausible explanation for the negative returns. We also show that OTC stocks that once traded on the regular exchanges perform much better than stocks that originate in the OTC markets.

Keywords: Prospect theory; Skewness; Lottery stocks; OTCBB (search for similar items in EconPapers)
JEL-codes: G10 G20 G38 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (42)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:115:y:2015:i:3:p:486-504

DOI: 10.1016/j.jfineco.2014.11.002

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