This paper documents the unique “large amount of stock dividends” phenomenon in the Chinese stock market and uses lottery-like stock preference to explain the inverted V shaped pattern of abnormal returns. Chinese listed firms often issue large percent of bonus shares, or transfer lots of capital reserve into common stocks. We find that after such operations, stocks tend to be overpriced in the short term and earn lower subsequent returns in the long run. Using two different measures of the lottery features, we document that the lottery characteristics of stocks significantly increase during the event window, which explains the inverted V shaped pattern on cumulative return spreads. Retail investors who chase these “lotteries” suffer welfare loss in the long run.
JEL classification numbers: G32, G41
Keywords: Speculation, Lottery, Stock dividends, Bonus shares
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