From anticipation to anxiety in a market for lottery-like stocks
Abstract
Purpose
The purpose of this paper is to investigate a unique sample of lottery-like stocks and contextualize their short-run price behavior with respect to behavioral principles.
Design/methodology/approach
The authors conduct a short-run event-study of the abnormal returns for stock market investments in Australian small-cap oil and gas (O & G) explorers centered on the drilling commencement (spudding) of 157 wildcat oil or gas wells drilled between January 2000 and June 2010.
Findings
Small-cap stock market investments associated with newly spudded wildcat O & G wells are negative NPV gambles rather than fair (zero NPV) investments. Once a wildcat well is spudded, the 30-day expected abnormal return is 6-8 percent: wealth-maximizing stockholders are advised to sell upon news of spudding, but gamblers may wish to hold on for the chance of a 10.6 percent 30-day average abnormal return (if the well is not plugged and abandoned). In the lead-up to each gamble the authors observe a significant pre-spudding stock price run-up on average, perhaps indicative of positively affected investors aroused by an easily imagined successful wildcat gusher as per evidence on the influence of image and affect on investors’ decisions (MacGregor et al., 2000; Loewenstein et al., 2001; Rottenstreich and Hsee, 2001; Peterson, 2002).
Originality/value
The wildcat drilling events considered in this paper are lottery-like by nature, and spudding represents the distinct moment when the gamble is unambiguously on, following shortly on from which investors either strike it lucky or strike out. The specifically small-cap wildcatters are typically heavily vested in one well at a time, therefore the sample stocks are uniquely lottery like. This differs from other studies which infer the lottery-like nature of their sample stocks from characteristics such as price and idiosyncratic volatility.
Keywords
Acknowledgements
JEL Classification – G02, G12, G14
The authors are grateful for the valuable comments of an anonymous referee. Hiroaki Suenaga provided helpful advice on econometric matters. The authors have also benefitted from the comments of seminar participants at Curtin University and the 2013 Financial Markets and Corporate Governance Conference.
Citation
Boisen, M., Durand, R.B. and Gould, J. (2015), "From anticipation to anxiety in a market for lottery-like stocks", Review of Behavioral Finance, Vol. 7 No. 1, pp. 42-59. https://doi.org/10.1108/RBF-09-2013-0029
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited