137 NTU Management Review Vol. 31 No. 3 Dec. 2021 The Study of Gambling Preference, Trading Pattern and Excess Comovement in Lottery-Like Stock Returns Zi-Mei Wang, Department of Finance, Ming Chuan University Nan-Hsuan Lou, Bank of Kaohsiung 1. Research Purpose When the gambling sentiment changes, returns on lottery-like stocks move in the same direction. This comovement cannot be explained by common risk factors and is known as the excess return comovement of lottery-like stocks. This study examines whether stock trading made by institutional and retail investors causes excess return comovement of lottery-like stocks in the Taiwanese stock market by using order-level data to measure trading patterns; explores which type of investors invest in lottery-like stocks habitually; and investigates how these investment behaviors affect the excess return comovement of the lottery-like stocks. We also examine whether the relationship between the excess return comovement of lottery-like stocks and the trading activity of retail investors changes when overall market gambling sentiment is high; whether this relationship changes when stock-level gambling changes depending on the months when the financial statements are released, or the proximity of the stock’s current price to its 52week high. Finally, this study analyzes whether the gambling trading of a stock increases the stock issuer’s tendency to make gamble-like decisions, such as increasing expenditure on R&D or engaging in financial misreporting. 2. Research Design The study sample comprises common stocks of companies listed in the Taiwan Stock Exchange. This study establishes a lottery index based on stock price, idiosyncratic skewness, and idiosyncratic volatility to identify each stock’s lottery likeness. We employ the Fama-French-Carhart four-factor model for the common risk factors and use overall return on lottery-like stocks as an additional independent variable. Then, the sensitivity of individual stock return to overall lottery-like stock return is regarded as the indicator for the excess return comovement of lottery-like stocks. Investor trading pattern is determined by using three indicators, namely order ratio, immediacy ratio, and order flow
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