Is the Stock Market a Casino?

Abstract

It has been 20 years since the inception of the Chinese stock market. However, the market is still being criticized as a casino. This article compares the stock return performance between lottery type and non-lottery type stocks. Through constructing a lottery index for each stock, we find that the average return for lottery type stocks is 10%~12% lower each year comparing with non-lottery type stocks. Firm size, liquidity, whether a company is an ST company and institutional holding moderate the relationship between our lottery index and future stock return. Specifically, we find that the relationship between our lottery index and future stock return is stronger among smaller stocks, illiquid stocks, ST stocks and stocks with lower institutional holding. Further analysis shows that the moderating role of firm size, liquidity, institutional holding and whether a stock is ST works mainly through its effect on lottery-type stocks rather than non-lottery stocks. Overall, our finding suggests that gambling is an important motivation that investors participate in the stock market, and the effect of gambling on Chinese stock market is profound