Death and jackpot: Why do individual investors hold overpriced stocks?
September 10, 2014
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.