What Are Benefits of Attracting Gambling Investors? Evidence from Stock Splits in China

Abstract

Analyzing a sample of Chinese firms splitting their stocks via stock dividends and using proprietary trading data to measure investors’ gambling preference, we find that stock splits raise the stocks’ lottery characteristics, making them attractive to gambling investors, who willingly pay higher prices for skewed securities. Split firms also become more risk-taking. Furthermore, their cost of equity declines, largely due to increased gambling investors’ pricing influence. Our findings suggest that firms with weak lottery characteristics and those with inefficient risk sharing, can use stock splits to attract gambling investors to improve risk sharing and to lower their cost of equity.