Asset pricing when social preference meets lottery preference: Evidence from China

There is substantial evidence indicating that stocks with lottery-like payoffs have lower returns. Unlike existing studies that focus on the role of investor behavior in accelerating lottery premiums, we propose that investors’ social preference toward corporate social responsibility (CSR) could alleviate the underperformance of lottery-like stocks. Using a sample of all Chinese listed A-share stocks, we show that a negative relationship between lottery preference and stock returns does not exist among stocks that behave well regarding CSR performance. Furthermore, we show that better CSR performance and higher institutional ownership mitigate the overpricing of lottery-like stocks. Our research contributes to CSR literature by showing that behaving socially responsible can prevent stock prices from being overpriced when the stock exhibits lottery-like payoffs.