SSRN Id4178162

THE ROLE OF ANCHORING ON INVESTORS’ GAMBLING
PREFERENCE: EVIDENCE FROM CHINA
ZHUO WANG† , ZIYUE WANG† , AND KE WU†
This draft: August 7, 2022.

†
School of Finance, Renmin University of China.
Wang: zhuo.wang@ruc.edu.cn; Wang: ziyuewang_ruc@163.com ; Wu: ke.wu@ruc.edu.cn
Zhuo Wang, zhuo.wang@ruc.edu.cn, Renmin University of China, School of Finance; Ziyue Wang, ziyue-
wang_ruc@163.com, Renmin University of China, School of Finance; Corresponding author: Ke Wu,
ke.wu@ruc.edu.cn, Renmin University of China, School of Finance. Wu acknowledges financial support from
the National Natural Science Foundation of China (No. 71803187 and No. 72173127). This work is supported
by the Public Computing Cloud, Renmin University of China.
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Electronic copy available at: https://ssrn.com/abstract=4178162

The Role of Anchoring on Investors’ Gambling Preference: Evidence from China
Abstract. This paper examines the anchoring effect of 52-week high price on the investors’
gambling preference in the Chinese A-share market. We document the gambling preference
only exists among stocks valued much lower than their 52-week high prices. Specifically, using
return skewness as a proxy for lottery stocks, we find that buying stocks in the lowest skewness
quintile and selling the highest earns a significant risk-adjusted return of 0.85% per month
for stocks far below their 52-week high prices. In contrast, it earns an insignificant return
of 0.04% per month for stocks close to their 52-week high prices. Moreover, high arbitrage
risk and investor sentiment strengthen the effect of anchoring on gambling preference. Our
findings are robust after considering the effects of capital gains overhang, under-reaction to
news, firm’s ownership status, and China’s non-tradable share reform.
Keywords: gambling preference; anchoring effect; limit to arbitrage; investor sentiment;
Chinese stock market
JEL classification: G02; G12; G14

I. Introduction
The gambling preference is a well-documented behavioral bias in the Chinese stock market
(Yao, Wang, Cui, and Fang, 2019; Gong, Wen, Xiong, and Gong, 2021; Zhu, Zhang, and Yang,
2021; Ji, Quan, Yin, and Yuan, 2021). On the one hand, Chinese market is dominated by
retail investors rather than institutions. Over 101 million retail investors have stock trading
accounts in China, and they own 88% of the market’s free-floating shares (Liu, Stambaugh,
and Yuan, 2019). On the other hand, the short selling limit leads to strong limit to arbitrage,
which exacerbates the mispricing of stocks (Chang, Luo, and Ren, 2014). Prior studies, such
as Yao, Wang, Cui, and Fang (2019), Zhu, Zhang, and Yang (2021), among others, document
that, in the Chinese stock market, investors prefer lottery stocks that may achieve extremely
high returns with low probability and these stocks under-perform the non lottery-like stocks.
In this paper, we explore the impact of 52-week high price on investors’ gambling pref-
erence. George and Hwang (2004) suggest that investors evaluate the potential for upward
price movement based on the 52-week high price. When the stock price is close to the highest
price within the previous 52 weeks, due to the psychological barriers, investors will consider
that it is difficult for the stock to break through the high point. Even if the stock is a lottery
stock, investors would not expect additional positive returns from the stock if they believe
the current price has already reached the possible maximum level. Thus, we predict that the
gambling preference is stronger when the current price is much lower than 52-week high price
but weaker or even disappears otherwise.
Barberis and Huang (2008) shows theoretically that the investors’ gambling preference
comes from the preference for skewness1. In the cumulative prospect theory of Tversky and
Kahneman (1992), investors evaluate risks using the transformed rather than objective proba-
bilities. Investors overestimate the probability of the extreme returns at the right tail, so they
prefer stocks with positively skewed distribution. In empirical studies, various factors such as
1
Bordalo, Gennaioli, and Shleifer (2012) also show that the skewness preference captures the gambling nature
of investors from the perspective of salience theory.
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the maximum daily returns (Bali, Cakici, and Whitelaw, 2011), failure probability (Campbel-
l, Hilscher, and Szilagyi, 2008), predicted jackpot probability (Conrad, Kapadia, and Xing,
2014), and bankruptcy probability (Ohlson, 1980) can be proxies for lottery-type stocks (An,
Wang, Wang, and Yu, 2020). However, An, Wang, Wang, and Yu (2020) emphasize that these
measures, although motivated from different perspectives, are related to each other because
lottery-like stocks identified by these measures exhibit a large skewness in returns. Therefore,
in line with the theoretical implications of Barberis and Huang (2008) and An, Wang, Wang,
and Yu (2020), we use the daily return skewness in the past month as the key variable to
identify lottery stocks2.
Overall, we conjecture that the 52-week high price will be the psychological barrier for
investors with gambling preference in selecting stocks with high return skewness. We provide
testable hypotheses that the skewness anomaly is pronounced among stocks much lower than
the 52-week high price. Besides, in line with our behavioral explanation, the mispricing should
be influenced by the limit to arbitrage and investor sentiment. Hence, we conjecture that the
psychological barrier effect should be stronger among stocks that facing high arbitrage risk
and during periods when investor sentiment is high.
We empirically test our hypotheses in the following ways. First, we test the existence of
skewness anomaly in the Chinese A-share market. We sort stocks into 10 groups in each month
based on the total skewness and find that the return differ between the lowest skewness stocks
and highest skewness stocks by 0.84% per month (annualized 10.08%) with the t-statistic
of 5.38. And the Fama-French 5-factor risk-adjusted alpha of the difference is 0.74% per
month with the t-statistic of 4.54. We also conduct the Fama and MacBeth (1973) regressions
to control for various firm specific characteristics, finding the statistically and economically
significant negative influence of skewness on the stock returns. Thus, consistent with Barberis
and Huang (2008), we show that the lottery-like stocks have significant lower returns than
non-lottery-like stocks.
2
We also use the composite lottery proxy following Kumar (2009) for robustness.
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Second, we examine how the skewness anomaly interacts with the anchor value. We
double sort the stocks into 25 portfolios based on the total skewness and nearness to 52-
week high price. For stocks far from the 52-week high price, buying the lowest skewness
stocks and selling the highest skewness stocks can earn a positive Fama-French 5-factor risk-
adjusted alpha of 0.85% per month at the 1% significance level. In contrast, for stocks near
the 52-week high price, this strategy only earns an insignificant alpha of 0.04% per month.
Furthermore, the 0.81% difference in the risk-adjusted alpha is significant both statistically
and economically. In addition, Fama-MacBeth regressions also show similar patterns when
controlling for various firm characteristics. These results confirm that the skewness anomaly
is affected by the psychological barrier of investors.
Third, to verify the findings above are indeed driven by psychological barrier effect, we
further explore how the limit to arbitrage affect the interaction between skewness and 52-week
high price. De Long, Shleifer, Summers, and Waldmann (1990) suggest that arbitrage risk is
one of the key reasons for mispricing to persist. If our psychological barrier hypothesis hold, our
results should be stronger among stocks that are more difficult to arbitrage. Following Pontiff
(1996) and Baker and Wurgler (2006), we use the idiosyncratic volatility as the measure of
arbitrage risk. The portfolio analysis and Fama-MacBeth regressions show that the interaction
between skewness and 52-week high price will be greater for stocks that are more difficult to
arbitrage, which helps explain why the mispricing associated with the interaction between
skewness and 52-week high price persists.
Last, we test the influence of investor sentiment on the interaction between skewness and
52-week high price. Baker and Wurgler (2006) suggest that when the investor’s sentiment
is high, investors are more prone to irrational behaviors, but when their sentiment is low,
they tend to calmly make investment decisions. The portfolio analysis and Fama-MacBeth
regressions show that the psychological barrier effect is stronger in the high sentiment periods
than in the low sentiment periods, which supports the behavioral explanation for the anchoring
effect of 52-week high price on the skewness anomaly.

Having established the interactions between the skewness and 52-week high price in ex-
plaining the cross-section of stock returns, we explore several alternative explanations. First,
An, Wang, Wang, and Yu (2020) document that lottery-related anomalies are affected by the
capital gains overhang. Investors will not prefer lottery-like stock when they face unrealized
gains evaluated based on the reference-dependent preferences. Zhu, Zhang, and Yang (2021)
also find similar results in the Chinese A-share market. When the stocks are near the 52-week
high price, investors may also face unrealized profits. While we find that our psychological
barrier effect also holds after controlling for the capital gains overhang effect.
Second, Zhang (2006) argues that investors tend to under react to news, which leads
to undervaluation with good news and the overvaluation of stocks with bad news. Mbanga
(2015) documents that the under-reaction to bad news is stronger when stocks are far from the
52-week high price. So the interactions we find above may be affected by the under-reaction
to news. Following Zhang (2006), we use prior 6-month return as the proxy for news and show
that after controlling for the under-reaction effect, the interaction between the skewness and
52-week high price is also significant, validating the psychological barrier effect.
In addition, we explore the influence of some institution-specific characteristics in the
Chinese A-share market, such as the state ownership and non-tradable share reform, on the
investors’ gambling preference and the psychological barrier effect. Prior studies argue that
there exist structural differences between state-owned and non-state-owned enterprises in the
governance structure and industry composition (Lin, Lu, Zhang, and Zheng, 2020; Jansen,
Swinkels, and Zhou, 2021). After the non-tradable share reform, the restrictions on state-
owned enterprises are relaxed, more non-tradable shares become freely tradable, and the reform
of accounting standards in the same period also makes the information more transparent and
reliable (Jansen, Swinkels, and Zhou, 2021), which may affect our results. Overall, we find
that the investors’ gambling preference and the psychological barrier effect are only slightly
weakened for the state-owned enterprises and in the post-reform periods.
Finally, we conduct various additional robustness tests. First, retail investors may be
more vulnerable to gambling preference and psychological barrier effect, while institutional
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investors will tend to be more rational. We find that our results are stronger for stocks with
high institutional ownership, but weaker for stocks with low institutional ownership. Second,
we use the composite lottery proxy following Kumar (2009) and find similar results. Third,
we consider the 13, 26, 104 week-high price as the anchor value and find that our results are
robust to the alternative anchor measures.
This paper contributes to the literature on the lottery-related anomalies in the Chinese
A-share market. Theoretical and empirical studies show that the lottery-like stocks underper-
form the non-lottery-like stocks (Barberis and Huang, 2008; Kumar, 2009; Bali, Cakici, and
Whitelaw, 2011; Byun, Goh, and Kim, 2020). And the lottery-related anomalies also exist in
the Chinese market (Yao, Wang, Cui, and Fang, 2019; Zhu, Zhang, and Yang, 2021; Gong,
Wen, Xiong, and Gong, 2021). Further studies suggest that the lottery-related anomalies
are related to individual investor attention and trading behavior(Yao, Wang, Cui, and Fang,
2019), capital gains overhang of Grinblatt and Han (2005) (Zhu, Zhang, and Yang, 2021),
gain and loss domains (Gong, Wen, Xiong, and Gong, 2021) and limit to arbitrage (Yao,
Wang, Cui, and Fang, 2019) in the Chinese market. In contrast, our findings suggest that the
investors’ gambling preference is related to the anchoring bias in the Chinese A-share market.
This paper also contributes to the literature on anchoring bias. Anchoring bias is one of
the behavioral bias of investors. Investors take the historical stock price as the anchor value,
and conduct their investment decisions based on the anchor. George and Hwang (2004) take
the highest price of the historical 52 weeks as the anchor point, and find that investors are
unwilling to buy stocks with price close to the anchor point. Related literature uses the anchor
point to study the Dow index (Li and Yu, 2012), lottery-related anomalies (Byun, Goh, and
Kim, 2020), mergers and acquisitions (Baker, Pan, and Wurgler, 2012), and the delayed price
response to news (Huang, Lin, and Xiang, 2021). We build on the work of Byun, Goh, and Kim
(2020) who study the impact of psychological barrier on the lottery-related anomalies in the
US market, but it is unclear whether these results also hold for the Chinese stock market with
the large proportion of retail investors with speculative short-term behavior. Complementing
these related studies, we provide new evidence and explore the influence of institution-specific
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characteristics in the Chinese A-share market. Our results support that the anchor point of
historical high price also affects the investors’ gambling preference of Chinese investors.
The remainder of the paper is organized as follows. Section II describes our data and
variables construction. Section III provides our main empirical results of the skewness anomaly
and its interactions with the anchor value. Section IV discusses alternative explanations and
shows various robustness tests. Section V concludes the paper.
II. Data and variables construction
Our data consist of all RMB-denominated stocks listed on Shanghai and Shenzhen Stock
Exchange. All stock trading data, financial statement data and factor return data are obtained
from the China Stock Market & Accounting Research (CSMAR) database. Following Liu,
Stambaugh, and Yuan (2019), we filter the data as follows: (1) Exclude companies that
have been listed for less than 6 months; (2) Exclude companies in the financial industry and
exclude ST stocks; (3) Exclude stocks with less than 120 trading days in the past 12 months;
(4) Exclude stocks with less than 15 trading days in the previous month. Following Jansen,
Swinkels, and Zhou (2021), the sample starts in January 2000 and ends in December 2021
with 481679 month-stock level observations.
We use the total skewness SKEW N ESS, constructed following Bali, Engle, and Murray
(2016), as the proxy for the lottery-like stocks. The formula for SKEW N ESS of stock i in
month t is:
D 3
n X ri,t,d − r̄i,t
SKEW N ESSi,t = (1)
(n − 1)(n − 2) Si,t
d=1
where ri,t,d is the daily return of stock i on day d of month t, r̄i,t is the average daily return of
stock i in month t and Si,t is the sample standard deviation of daily return of stock i in month
t. We require stocks to have at least 15 days of daily return. The higher the total skewness of
one stock, the longer the right tail of the stock return and the stronger the lottery features.
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There are two reasons why we use the total skewness as the main proxy for lottery feature.
First, Barberis and Huang (2008) shows theoretically that the security’s own skewness can be
priced due to the probability weighting function in the cumulative prospect theory of Tversky
and Kahneman (1992), which captures the investor’s preference for the lottery-like stocks.
Second, the total skewness, which is directly calculated from past stock returns, can be easily
perceived by investors. The stocks with higher total skewness show more extreme positive past
returns. Therefore, investors would treat these stocks as lotteries and affect their investment
decisions.
Next, we use the nearness to the 52-week highest price (W52 ) as the measure of investor’s
psychological barrier for stock prices following George and Hwang (2004). Specifically, for each
stock i in month t, we calculate the W52 as
P RCi,t
W 52i,t = (2)
52HIGHi,t
where P RCi,t is the price of stock i in month t and 52HIGHi,t is the highest price of stock i
during past 52 weeks3. The value of W 52 is between 0 and 1. The higher the value, the closer
the current stock price is to its highest price in 52 weeks and the stronger the psychological
barrier effect of investors.
We also consider various characteristics in the empirical analyses, including idiosyncratic
volatility (IV OL) of Ang, Hodrick, Xing, and Zhang (2006), investor sentiment (SENTIMEN-
T ) following Yi and Mao (2009), market beta (BET A), natural logarithm of market capi-
talization (M E), book-to-market ratio (BM ), natural logarithm of share prices (P RICE),
illiquidity measure (ILLIQ) as in Amihud (2002), prior 6-month returns (R6), prior 11-month
returns (R11), long-term reversal (REV ERSAL), institutional ownership (IN IP ROP ), cap-
ital gains overhang (CGO) and state-owned enterprises (SOE). The definitions of these
characteristics are provided in the appendix A.
3Since many listed companies in the Chinese stock market pay dividends, here we use the closing price with
the reinvestment of cash dividends.
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Table 1 reports the summary statistics for the main variables and firm characteristics.
Table 1 shows that the mean of SKEW N ESS is 0.0395 and the standard deviation is 0.7800,
indicating large SKEW N ESS differences among different stocks. The extreme right tail
return of lottery-like stocks will attract more investors with gambling preference. In addition,
we also report the time-series average of cross-sectional correlations between these variables in
table B1 in the appendix. There exist significant correlations between stock return and these
variables. Therefore, it is necessary to control for the influence of these characteristics in our
empirical analyses.
[Insert Table 1 about here]
III. Empirical Results
In this section, we discuss our main empirical results. First, we document the statistically
and economically significant skewness anomaly in the Chinese A-share market, consistent with
the theoretical implications of Barberis and Huang (2008). Second, we study how the skewness
anomaly interacts with the anchor value. Third, we further explore how the limit to arbitrage
affect the skewness anomaly and the psychological barrier effect. Fourth, we examine the
influence of investor sentiment.
III.1. Skewness anomaly.
We begin by confirming the theoretical implications of Barberis and Huang (2008) that
the stocks with high skewness underperform those with low skewness. For each month, we sort
stocks into 10 groups based on the total skewness (SKEW N ESS) and calculate the portfolio
return by averaging (equal-weighted or value-weighted) returns in each portfolio. Table 2
reports the average monthly raw returns and Fama and French (2015) 5-factor risk-adjusted
alphas of the 10 SKEW N ESS portfolios, with the t-statistics adjusted by Newey and West
(1987) method and reported in parentheses. The equal-weighted average raw returns differ
between low SKEW N ESS (in group 1) and high SKEW N ESS (in group 10) by 0.84%
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per month with the t-statistic of 5.38. The Fama-French 5-factor risk-adjusted alphas of
equal-weighted returns differ between the lowest and highest SKEW N ESS deciles by 0.74%
per month with the t-statistic of 4.54. Similarly, the value-weighted average raw returns and
Fama-French 5-factor risk-adjusted alphas significantly decrease across the SKEW N ESS
deciles. The average returns and alphas differ between the lowest and highest SKEW N ESS
deciles by 0.57% and 0.43% per month with the t-statistic of 2.58 and 1.91, respectively.
Thus, consistent with Barberis and Huang (2008), we find that the lottery-like stocks have
statistically and economically significant negative abnormal returns.
In addition, to control for various firm specific characteristics, we conduct Fama-MacBeth
regressions. All continuous variables are winsorized at the 1th and 99th percentiles to eliminate
outliers. Table 4 reports the monthly averages of the estimated coefficients and the Newey
and West (1987) adjusted t-statistics are shown in parentheses. Consistent with the results
of portfolio analyses, in column (1) of table 4, the coefficient of SKEW N ESS is -0.3275
and statistically significant at the 1% level. The statistically significant negative coefficient
indicates that the SKEW N ESS has a significant negative relation with the next month
return. And the impact is also economically meaningful: the average impact of one standard
deviation shift in SKEW N ESS on the next month stock return is 0.25%. Column (2) of
table 4 shows that the negative correlation is still significant after controlling for the market
beta (BET A), natural logarithm of market capitalization (M E), book-to-market ratio (BM ),
natural logarithm of share prices (P RICE), prior 6-month returns (R6), prior 11-month
returns (R11), long-term reversal (REV ERSAL) and illiquidity measure (ILLIQ) of Amihud
(2002). These results further confirm the existence of skewness anomaly in the Chinese A-share
market.
III.2. Psychological barrier and skewness.
In this subsection, we explore how the skewness anomaly interacts with the anchor value.
Previous literature, such as George and Hwang (2004), shows that investors tend to consider
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the highest price within the previous 52 weeks as the upper bound of the price and do not
expect the stock price will exceed 52-week high. Even if the stock is a lottery-like stock, due
to the psychological barrier, investors may not have gambling preference when the price nears
the 52-week high. In contrast, when the price is much lower than its 52-week high, investors
would expect that the price has large room to increase, which aggravating their gambling
preference. Thus, we predict that the skewness anomaly would be stronger among stocks
much lower than the 52-week high price but weaker or even disappear among stocks near the
52-week high price.
To test the hypothesis above, we first independently double sort the stocks into 25 port-
folios based on W 52 and SKEW N ESS. Panel A of table 3 shows the monthly average raw
returns and Fama-French 5-factor risk-adjusted alphas of equal-weighted portfolios. For s-
tocks much lower than the 52-week high price, buying the lowest SKEW N ESS stocks and
selling the highest SKEW N ESS stocks can earn a significant return of 0.94% per month
with Newey and West (1987) adjusted t-statistic of 5.66. And the corresponding Fama-French
5-factor risk-adjusted alphas is 0.85% per month and statistically significant at the 1% level.
In contrast, for stocks near the 52-week high price, the return difference between the lowest
and highest SKEW N ESS stocks is only 0.05% per month with t-statistic of 0.27. And its
corresponding Fama-French 5-factor alpha is 0.04% with t-statistic of 0.17. More importantly,
the lottery anomaly return between the stocks far from and near the 52-week high price is
0.88% per month and statistically significant at the 1% level. The difference is also significant
in 5-factor alphas (0.81% per month with t-statistic of 3.01). The results of value-weighted
portfolios in panel B also show the similar patterns. Thus, the results of portfolio analyses
support the hypothesis that investors have higher gambling preference when the current stock
price is much lower than the 52-week high price.
In addition, to control for various firm characteristics, we also conduct Fama-MacBeth
regressions. We first split stocks into two groups in each month based on the median of
W 52. Columns (3) and (4) in table 4 show that in the group far from the 52-week high
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price, the estimated coefficient of SKEW N ESS is -0.3251, which means the average impact
of one standard deviation shift in SKEW N ESS on the next month stock return is 0.25%
per month. While in the group near the 52-week high price, the estimated coefficient of
SKEW N ESS is only -0.2422, and the average impact of one standard deviation shift decrease
to 0.19%. Following the methods of Cleary (1999), we also test the difference of SKEW N ESS
coefficient between the two groups, shown by the empirical p-value of 0.063 in table 4, which is
obtained by 1000 bootstrap samples. It confirms the significant coefficient difference between
the two groups. In addition, we consider different model specifications. We run the following
Fama-MacBeth regression
Ri,t+1 = λ0 + λ1 SKEW N ESSi,t + λ2 W 52i,t + λ3 W 52i,t × SKEW N ESSi,t
+ λ4 BET Ai,t + λ5 BMi,t + λ6 M Ei,t + λ7 P RICEi,t + λ8 R6i,t (3)
+ λ9 R11i,t + λ10 REV ERSALi,t + λ11 ILLIQi,t + εi,t+1
Column (6) of table 4 shows that after controlling for various firm characteristics, the
estimated coefficient of skewness is -0.9655 with Newey and West (1987) adjusted t-statistic
of 2.62. And the estimated coefficient of the interaction term of SKEW N ESS and W 52
is 0.8212 and statistically significant at the 5% level. These results further support that the
skewness anomaly is affected by the psychological barrier of investors.
III.3. Limit to arbitrage.
In this subsection, we focus on how limit to arbitrage affects the skewness anomaly and
the investor’s psychological barrier effect documented earlier. De Long, Shleifer, Summers,
and Waldmann (1990) suggest that arbitrage risk is one of the key reasons for mispricing
to persist. Thus, we predict that the skewness anomaly and the psychological barrier effect
would be stronger among stocks that facing high arbitrage risk.

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Following Pontiff (1996) and Baker and Wurgler (2006), we use the idiosyncratic volatility
as the arbitrage risk measure. We first sort stocks into two groups based on the median of
IV OL by each month. Then, with each IV OL group, we independently double sort stocks into
25 portfolios based on SKEW N ESS and W 52. We report the return difference between the
highest-skewness and lowest-skewness stocks for each IV OL-W 52 portfolio. Table 5 reports
the impact of the limits to arbitrage on the skewness anomaly and the psychological barrier
effect. Panel A reports the results of equal-weighted portfolios. We find that the skewness
anomaly and the psychological barrier effect are stronger in the high arbitrage risk group
of stocks. Specifically, first, the skewness anomaly returns are higher for high idiosyncratic
volatility stocks. Second, for high idiosyncratic volatility stocks, the skewness anomaly returns
differ between the low and high W 52 quintiles by 1.07% per month with the t-statistic of 2.88.
And the corresponding Fama-French 5-factor alpha is 1.02% per month with the t-statistic of
2.47. In contrast, for low idiosyncratic volatility stocks, the skewness anomaly return difference
between highest and lowest W 52 quintiles is only 0.22% per month with the t-statistic of 0.68.
And the Fama-French 5-factor alpha is 0.19% with the t-statistic of 0.56. The results of
value-weighted portfolios shown in panel B also display similar patterns.
Furthermore, we also conduct Fama-MacBeth regressions to control for various firm char-
acteristics. Table 6 show that the psychological barrier effect is statistically and economically
stronger in the high arbitrage risk group. Specifically, in the high IV OL group, the average
impact of one standard deviation shift in SKEW N ESS on the next month stock return for
stocks far from and near 52-week high is 0.22% (significant at the 1% level) and 0.09% (not
significant at the 10% level) per month, respectively. And the difference is significant at the
5% level with the empirical p-value of 0.026. In contrast, the difference in the low IV OL group
is not significant with the empirical p-value of 0.371. These results show that psychological
barrier effect is stronger when arbitrage is more limited and support the psychological barrier
hypothesis to explain skewness anomaly. Overall, we conclude that limit to arbitrage helps
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explain why the mispricing associated with the interaction between SKEW N ESS and W 52
persists.
III.4. Investor sentiment.
In this subsection, we further explore how investor sentiment affect the gambling prefer-
ence and the psychological barrier effect. Baker and Wurgler (2006) suggest that when the
investor’s sentiment is high, they would be more prone to speculative irrational behavior, but
when their sentiment is low, they tend to calmly make investment decisions. As an irrational
behavior of investors, we predict that the investors’ gambling preference and the psychological
barrier effect are stronger during periods when investor sentiment is high.
We first sort stocks into two groups based on the median of SEN T IM EN T . Then, in
each SEN T IM EN T group, we independently double sort stocks into 25 portfolios based on
SKEW N ESS and W 52. We report the return difference between the highest-skewness and
lowest-skewness stocks for each SEN T IM EN T -W 52 portfolio. Table 7 reports the impact of
investor sentiment on the investors’ gambling preference and the psychological barrier effect.
Panel A reports the equal-weighted portfolios. We find that the skewness anomaly is stronger
in the period of high investor’s sentiment. Besides, in the high investor’s sentiment period, the
skewness anomaly return differs between the low and high W 52 quintiles by 0.98% per month
with the t-statistic of 2.88. And the corresponding Fama-French 5-factor alpha is 1.07% per
month with the t-statistic of 3.12. In contrast, in the low investor’s sentiment period, the
skewness anomaly return difference between highest and lowest W 52 quintiles is only 0.81%
per month with the t-statistic of 1.69. And the Fama-French 5-factor alpha is 0.60% with the
t-statistic of 1.13. Panel B shows the results of value-weighted portfolios, which also display
similar patterns. These results are consistent with our hypothesis that irrational investors take
past 52-week high price as the anchor value hence influencing the preference for lottery-like
stocks, which is affected by investor sentiment.

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In addition, we conduct Fama-MacBeth regressions to control for various firm character-
istics and test this hypothesis. Table 8 show that the psychological barrier effect is stronger in
high investor’s sentiment periods. Specifically, in the high SEN T IM EN T group, the average
impact of one standard deviation shift in SKEW N ESS on the next month stock return for
stocks far from and near 52-week high is 0.32% (with t-statistic of 6.64) and 0.20% (with
t-statistic of 3.03) per month, respectively. And the difference is significant at the 1% level
with the empirical p-value of 0.008. In contrast, the difference in the low SEN T IM EN T
group is not significant with the empirical p-value of 0.304. Overall, the results above support
the behavioral explanation for the influence of anchor point on the skewness anomaly.
IV. Robustness
In this section, we conduct various robustness tests. We first explore whether the effect
of capital gains overhang and under-reaction to news subsume the psychological barrier effect.
Then we consider the influence of the state ownership, the institution-specific characteristics
in the Chinese A-share market, on the investors’ gambling preference and the psychological
barrier effect. Besides, we use alternative measure of lottery-like stocks for robustness. Finally,
our results are stronger for stocks with more retail investors, and robust to alternative anchor
values and different sample periods.
IV.1. The effect of capital gains overhang.
An, Wang, Wang, and Yu (2020) document that lottery-related anomalies are related to
the capital gains overhang of Grinblatt and Han (2005). They argue that investors’ gambling
preferences are reference-dependent. They prefer lottery-like stocks when facing unrealized
losses but not when facing unrealized gains. Zhu, Zhang, and Yang (2021) also document
similar patterns in the Chinese A-share market. When the stocks are near the 52-week high
price, investors may also face unrealized gains hence they don’t prefer lottery-like stocks, which
16

may drive our results. To address this concern, following Zhu, Zhang, and Yang (2021), we
conduct Fama-MacBeth regression as
Ri,t+1 = λ0 + λ1 SKEW N ESSi,t + λ2 W 52i,t + λ3 W 52i,t × SKEW N ESSi,t + λ4 CGOi,t
+ λ5 CGOi,t × SKEW N ESSi,t + λ6 BET Ai,t + λ7 BMi,t + λ8 M Ei,t + λ9 P RICEi,t
+ λ10 R6i,t + λ11 R11i,t + λ12 REV ERSALi,t + λ13 ILLIQi,t + εi,t+1
(4)
Column (2) of table 9 shows the estimated coefficient of SKEW N ESS and its interac-
tion with W 52 after controlling for the capital gains overhang effect. The coefficient of the
SKEW N ESS-W 52 interaction term is 0.7495 with the t-statistic of 2.11 after controlling for
the interaction between CGO and SKEW N ESS. Besides, we also conduct triple-sort port-
folio analysis and find that the psychological barrier effects are significant in both high CGO
group and low CGO group. The results are reported in table B2 in the appendix. Overall,
we conclude that the interaction between the SKEW N ESS and W 52 can’t be subsumed by
the capital gains overhang effect of An, Wang, Wang, and Yu (2020).
IV.2. Under-reaction to news.
Zhang (2006) argues that investors tend to under react to news, which leads to under-
valuation with good news and the overvaluation of stocks with bad news. Mbanga (2015)
documents that the under-reaction to bad news is stronger when stocks are much lower than
the 52-week high price. Since lottery-like stocks are related to financial distress, they often face
bad news. So our psychological barrier effect may be the result of the weaker under-reaction
to news when stocks near the 52-week high price. To mitigate this concern, following Zhang
(2006), we use prior 6-month returns (R6) as the proxy of news and conduct Fama-MacBeth
17

regression as
Ri,t+1 = λ0 + λ1 SKEW N ESSi,t + λ2 W 52i,t + λ3 W 52i,t × SKEW N ESSi,t
+ λ4 R6i,t + λ5 R6i,t × W 52i,t + λ6 BET Ai,t + λ7 BMi,t + λ8 M Ei,t (5)
+ λ9 P RICEi,t + λ10 R11i,t + λ11 REV ERSALi,t + λ12 ILLIQi,t + εi,t+1
Column (4) of table 9 shows the estimated coefficient of SKEW N ESS and its interac-
tion with W 52 after controlling for the under-reaction to news effect. The interaction term
W 52-SKEW N ESS is positive with the coefficients of 0.8302 and the t-statistic of 2.19 after
controlling for the interaction between R6 and W 52, which rules out the alternative explana-
tion of under-reaction to news and further supports our psychological barrier hypothesis.
IV.3. State ownership.
The state ownership is a specific characteristic of the Chinese A-share market. There exist
structural differences between state-owned and non-state-owned enterprises in the governance
structure and industry composition (Lin, Lu, Zhang, and Zheng, 2020; Jansen, Swinkels, and
Zhou, 2021). So we further explore how the nature of state-owned enterprises affect the
gambling preference and the psychological barrier effect. We split the whole sample into two
groups according to state-owned and non-state-owned enterprises, and conduct Fama-MacBeth
regressions to explore the differences between the two groups.
Column (1) and (2) of table 10 show that the skewness anomaly exists both in state-
owned and non-state-owned enterprises. The estimated coefficient of SKEW N ESS is -0.2885
and -0.3299 with the t-statistic of -4.10 and -3.23, respectively. Column (3)-(6) show that
the psychological barrier effect is stronger in the group of non-state-owned enterprises. The
empirical p-value for the estimated coefficient SKEW N ESS difference between low-W 52 and
high-W 52 is 0.044 for non-state-owned enterprises, but is 0.148 for state-owned enterprises.
Although the latter difference not statistically significant, it is economically significant. The
average impact of one standard deviation shift in SKEW N ESS on the next month stock
18

return is about 0.29% per month for stocks far from 52-week high price and about 0.20% per
month for stocks near 52-week high price. So we conclude that there is little influence of the
state ownership on our results.
IV.4. Alternative lottery proxy.
In our main empirical results, we follow the theoretical implication of Barberis and Huang
(2008) and use the total skewness as the lottery-like stock proxy. In this subsection, we apply
the composite lottery proxy following the empirical paper of Kumar (2009). We sort all stocks
according to the idiosyncratic volatility, idiosyncratic skewness and stock price. Idiosyncratic
volatility and idiosyncratic skewness are ranked from low to high, and the stock price is ranked
from high to low. Then, according to the rankings, we construct the following index as the
lottery measure

IV OL− RAN Ki,t ISKEW N ESS− RAN Ki,t P RICE− RAN Ki,t
IN DEXi,t = + + /3
N N N
(6)
Stocks with lager IN DEX are more likely to be the lottery-like stocks. Table 11 reports
the results of Fama-MacBeth regressions. Column (1) and (2) show that the lottery-like stocks
have significant lower returns in next month. And column (3) and (4) show that the negative
correlation is stronger in the group of stocks far from their 52-week high price. The average
impact of one standard deviation shift in IN DEX on the next month stock return for stocks
far from and near 52-week high price is 0.53% (with t-statistic of 14.38) and 0.47% (with t-
statistic of 10.28) per month, respectively. And the difference is significant at the 5% level with
the empirical p-value of 0.035. These results show that our results are robust to alternative
measure of lottery-like stocks.
IV.5. Additional robustness tests.

19

In addition to above tests, we also conduct various additional robustness tests. First, as
retail investors tend to be more vulnerable to gambling preference and psychological barrier
effect, while institutional investors tend to be more rational (Kumar, 2009), we divide all stocks
into high and low groups according to the median of institutional ownership (IN IP ROP ) by
each month. The results in table B3 in the appendix show that the investors’ gambling
preference and the psychological barrier effect are stronger for stocks with high institutional
ownership, but weaker for stocks with low institutional ownership.
Second, we consider the effect of non-tradable share reform in the Chinese A-share market.
After the non-tradable share reform, the restrictions on state-owned enterprises are relaxed,
more non-tradable shares become freely tradable, and the reform of accounting standards in
the same period also makes the information more transparent and reliable (Jansen, Swinkels,
and Zhou, 2021), which may affect our results. We split our sample into pre-reform (from
January 2000 to December 2006) and post-reform (from January 2007 to December 2021),
then test in each subsample. The results in table B4 and B5 in the appendix show that
although our results are weaker after the non-tradable share reform, the psychological barrier
effect is statistically and economically significant in both subsamples.
Finally, we consider the 13, 26, 104 week-high price as the anchor values and use the
portfolio analyses and Fama-MacBeth regressions to test our hypotheses. The results are
reported in table B6, B7, B8 and B9 in the appendix. We find that the results are similar to
the 52-week high price. Overall, we conclude that our results are robust to various subsamples
and alternative anchor values.
V. Conclusion
Barberis and Huang (2008) show theoretically that lottery-like stocks with high skewness
earn significant negative abnormal returns. Our paper provide further international evidence
for the anchoring effect of historical high price on the investorsâĂŹ gambling preference using
Chinese stock market data. Based on portfolio sorting and Fama-MacBeth regressions, we find
20

that there exists significant skewness anomaly in the Chinese A-share market. When valued
much lower than their 52-week high prices, the lottery stocks as proxied by high skewness
significantly underperform the non-lottery stocks. In contrast, for stocks near the 52-week high
prices, the lottery-like stocks no longer underperform non-lottery-like stocks. Additionally, we
show that the interaction between skewness and 52-week high price is stronger among stocks
with high arbitrage risk and during periods when the investor sentiment is high, which supports
the persistence and behavioral explanation of mispricing.
Moreover, we confirm the investors’ gambling preference and its interaction with the 52-
week high price are robust to various subsamples, alternative definitions of lottery stocks and
anchor values. Our results are valid after controlling for alternative explanations of capital
gains overhang and under-reaction to news. The institution-specific characteristics in the
Chinese A-share market, such as the state ownership and non-tradable share reform, have
little influence on our results. These findings support our psychological barrier hypothesis
that investors mentally treat the past high price as the upper limit and no longer prefer
lottery-like stocks when their prices are close to the past highs. These findings also deepen
our understanding of the investors’ behavioral bias and shed light on one potential factor that
undermines the price efficiency in the Chinese stock market.
21

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24

Table 1 Summary statistics
Variables Observations Mean Std. dev. Min P50 Max

Return(%) 481679 0.9555 12.8736 -29.9319 -0.1792 44.1850
W52 481679 0.7921 0.1634 0.3589 0.8063 1.0000
SKEWNESS 481679 0.0395 0.7800 -2.0015 0.0291 2.1046
BETA 481679 1.0944 0.4219 -0.3202 1.0757 2.7993
BM 481679 0.4321 0.2917 0.0607 0.3560 1.5615
ME 481679 3.1045 0.0435 3.0134 3.1000 3.2303
PRICE 481679 2.3929 0.7270 0.8961 2.3495 4.4350
R6 481679 0.0599 0.3558 -0.5228 -0.0145 1.5355
R11 481679 0.1181 0.5352 -0.6109 -0.0226 2.4032
REVERSAL 481679 0.4343 1.0352 -0.6835 0.1201 5.3857
ILLIQ 481679 0.1133 0.2162 0.0020 0.0393 1.3538
CGO 390378 -0.1160 0.2082 -7.1059 -0.0764 0.6448
IVOL 481679 0.0183 0.0094 0.0046 0.0162 0.0494
SOE 393754 0.4569 0.4981 0.0000 0.0000 1.0000
INIPROP 445446 4.7634 13.1956 0.0000 0.7854 95.6776
SENTIMENT 446154 0.6377 0.4807 0.0000 1.0000 1.0000
INDEX 481679 0.5003 0.1669 0.0046 0.4945 0.9916
Note: This table reports the number of observations, mean, standard deviation, min, median, and
max of various firm characteristics. A list of variables include the nearness to the 52-week highest
price (W52 ), total skewness (SKEWNESS ), market beta (BETA), book-to-market ratio (BM ), natural
logarithm of market capitalization (ME ), natural logarithm of stock price (PRICE ), prior 6-month
returns (R6 ), prior 11-month returns (R11 ), long-term reversal (REVERSAL), illiquidity measure
(ILLIQ) of Amihud (2002), capital gains overhang (CGO), idiosyncratic volatility (IVOL), state-
owned enterprises (SOE ), institutional ownership (INIPROP ), investor sentiment (SENTIMENT )
and the composite lottery proxy (INDEX ). The details of characteristic definitions are shown in the
Appendix. The sample period is from January 2000 to December 2021, except for SOE (January 2003
to December 2021) and SENTIMENT (February 2003 to December 2021).
25

Table 2 Returns and alphas on portfolios sorted by SKEW N ESS
Equal-weighted Value-weighted
Groups Average SKEWNESS
raw return 5-factor alpha raw return 5-factor alpha
1(Low) 1.36 0.9 0.93 0.56 -1.12
2 1.41 0.95 1.10 0.75 -0.66
3 1.39 0.96 1.05 0.70 -0.43
4 1.27 0.83 0.97 0.60 -0.25
5 1.24 0.76 0.96 0.54 -0.08
6 1.14 0.71 0.95 0.61 0.08
7 1.13 0.74 0.95 0.64 0.26
8 0.94 0.54 0.78 0.47 0.46
9 0.93 0.53 0.81 0.54 0.73
10(High) 0.52 0.17 0.36 0.14 1.28
10-1 -0.84*** -0.74*** -0.57** -0.43*
t-statistic (-5.38) (-4.54) (-2.58) (-1.91)
Note: This table reports the average monthly raw and Fama-French 5-factor risk-adjusted returns
of the 10 SKEW N ESS portfolios. For each month, we sort stocks into 10 groups based on the
total skewness (SKEW N ESS) and calculate the portfolio return by averaging (equal-weighted or
value-weighted) the returns in each portfolio. The t-statistics are adjusted by Newey and West (1987)
method and reported in parentheses. Significance at the 1%, 5%, and 10% levels is indicated by ***,
**, and *, respectively.
26

Table 3 Double-sort using SKEW N ESS and W 52
Panel A: Equal-weighted portfolios

SKEWNESS
W52
1(Low) 2 3 4 5(High) 5-1: return t-statistic 5-1: alpha t-statistic
1(Far) 0.84 0.70 0.51 0.37 -0.10 -0.94*** (-5.66) -0.85*** (-4.87)
2 0.96 0.89 0.63 0.47 0.03 -0.93*** (-6.50) -0.93*** (-6.14)

3 0.86 0.72 0.76 0.56 0.05 -0.82*** (-5.11) -0.81*** (-5.03)
4 0.91 0.85 0.82 0.57 0.37 -0.54*** (-3.40) -0.50*** (-3.07)
5(Near) 0.48 0.66 0.63 0.48 0.43 -0.05 (-0.27) -0.04 (-0.17)
5-1: return -0.36 -0.04 0.12 0.10 0.53 0.88*** (3.54) 0.81*** (3.01)
t-statistic (-1.23) (-0.15) (0.39) (0.34) (1.63)
5-1: alpha -0.17 0.26 0.35 0.36 0.65*
t-statistic (-0.55) (0.81) (1.06) (1.16) (1.87)
Panel B: Value-weighted portfolios
27
SKEWNESS
W52
1(Far) 0.37 0.31 0.04 0.00 -0.65 -1.03*** (-4.93) -0.85*** (-3.65)
2 0.62 0.59 0.37 0.07 -0.09 -0.71*** (-3.30) -0.69*** (-3.08)
3 0.60 0.36 0.49 0.36 -0.03 -0.62*** (-2.91) -0.53** (-2.44)
4 0.66 0.77 0.68 0.46 0.37 -0.30 (-1.40) -0.27 (-1.18)
5(Near) 0.35 0.54 0.73 0.61 0.63 0.28 (1.05) 0.28 (1.01)
5-1: return -0.02 0.23 0.68* 0.60* 1.28*** 1.30*** (4.22) 1.13*** (3.47)
t-statistic (-0.07) (0.67) (1.77) (1.72) (3.36)
5-1: alpha 0.25 0.66* 1.02** 0.95*** 1.38***
t-statistic (0.68) (1.74) (2.42) (2.64) (3.37)
Note: We independently double sort the stocks into 25 portfolios based on total skewness (SKEW N ESS) and nearness to 52-week high (W 52). This
table reports the equal-weighted and value-weighted portfolio returns by averaging returns of stocks in each portfolio. We use monthly Fama-French
5-factors to obtain alphas. The t-statistics are adjusted by the Newey and West (1987) method and reported in parentheses. Significance at the 1%,
5%, and 10% levels is indicated by ***, **, and *, respectively.
Table 4 The impact of skewness on stock returns
(1) All (2) All (3) Far (4) Near (5) All (6) All
Variables Return Return Return Return Return Return
SKEWNESS -0.3275*** -0.2886*** -0.3251*** -0.2422*** -0.9419** -0.9655***
(-3.6901) (-3.9249) (-3.7398) (-2.9478) (-2.3498) (-2.6195)
W52×SKEWNESS 0.8343* 0.8212**
(1.8635) (1.9904)
W52 0.0308 0.0028
(0.0253) (0.0038)
BETA -0.1743 -0.0700 -0.2885* -0.1979*
(-1.4332) (-0.6723) (-1.9680) (-1.7675)
BM 0.1224 0.1454 0.2384 0.1175
(0.5004) (0.5442) (0.9722) (0.5128)
ME -1.0617 -1.6066 0.5240 -0.4666
(-0.3743) (-0.5869) (0.1801) (-0.1660)
PRICE -0.3536* -0.5885*** -0.1298 -0.3226*
(-1.9678) (-2.9448) (-0.7147) (-1.7983)
R6 -0.1856 0.0789 -0.2754 0.0989
(-0.5921) (0.2047) (-0.8495) (0.3288)
R11 0.6227*** 0.5330** 0.6998*** 0.7927***
(2.7053) (2.0197) (2.9529) (3.4296)
REVERSAL 0.0092 0.0672 0.0342 0.0188
(0.1890) (0.7423) (0.3907) (0.3802)
ILLIQ 7.9950*** 12.0227*** 6.5662*** 8.2010***
(5.7427) (5.2822) (4.6663) (5.9453)
Constant 1.0891* 4.8685 6.8761 -0.2667 0.8367 2.7561
(1.7298) (0.5353) (0.7840) (-0.0286) (0.6411) (0.3026)
Empirical p-value 0.063
Adj-R2 0.0062 0.0981 0.0952 0.0913 0.0334 0.1063
Observations 481679 481679 240772 240907 481679 481679
Note: This table reports the times-series averages of cross-sectional regression coefficients. We run
Fama and MacBeth (1973) regressions of the stock return on the lagged independent variables. The
main independent variables include our main lottery-like stock measure (SKEW N ESS) and its inter-
action term with W 52, nearness to 52-week high (W 52), market beta (BET A), book-to-market ratio
(BM ), natural logarithm of market capitalization (M E), natural logarithm of stock price (P RICE),
prior 6-month returns (R6), prior 11-month returns (R11), long-term reversal (REV ERSAL) and
illiquidity measure (ILLIQ) of Amihud (2002). All variables are winsorized. Following Cleary (1999),
we test the significance difference of SKEW N ESS coefficient between the far and near 52-week high
groups. The results are shown in the empirical p-value, which is obtained by 1000 bootstrap sam-
ples. The t-statistics are adjusted by Newey and West (1987) method and reported in parentheses.
Significance at the 1%, 5%, and 10% levels is indicated by ***, **, and *, respectively.
28

Table 5 Portfolio analysis of limit to arbitrage
W52
1(Far) 2 3 4 5(Near) 5-1: return 5-1: alpha
IVOL Low -0.40 -0.42** -0.49*** 0.37 -0.18 0.22 0.19
(-1.57) (-2.00) (-2.94) (1.45) (-0.79) (0.68) (0.56)
High -0.77*** -0.78*** -0.67*** -0.58** 0.30 1.07*** 1.02**
(-3.38) (-4.53) (-3.75) (-2.43) (1.01) (2.88) (2.47)
IVOL Low -0.66** -0.12 -0.33 0.53* 0.05 0.70* 0.55
(-2.18) (-0.42) (-1.41) (1.82) (0.17) (1.91) (1.41)
High -0.86*** -0.78*** -0.73** -0.91*** 0.61* 1.47*** 1.41***
(-2.98) (-3.09) (-2.55) (-2.79) (1.70) (3.20) (2.93)
Note: We sort stocks into two groups based on the median of IV OL by each month. Then, in each
IV OL group, we independently double sort stocks into 25 portfolios based on SKEW N ESS and
W 52. We report the return difference between the highest-skewness and lowest-skewness stocks for
each IV OL-W 52 portfolio. We use monthly Fama-French 5-factors to obtain alphas. The t-statistics
are adjusted by the Newey and West (1987) method and reported in parentheses. Significance at the
1%, 5%, and 10% levels is indicated by ***, **, and *, respectively.
29

Table 6 Regression analysis of limit to arbitrage
High IVOL Low IVOL

Far Near Far Near
Variables Return Return Return Return
SKEWNESS -0.2860*** -0.1191 0.0312 0.0614
(-3.0204) (-1.2547) (0.3597) (0.6613)
BETA -0.0455 -0.2393 0.0997 0.1173
(-0.3371) (-1.5386) (0.7183) (0.5736)
BM -0.0511 0.1591 0.0299 0.0422
(-0.1605) (0.5362) (0.1049) (0.1484)
ME -0.3225 1.1960 -4.1958 -2.2275
(-0.1058) (0.3685) (-1.6475) (-0.8079)
PRICE -0.6477*** -0.0293 -0.4846** -0.1183
(-2.8668) (-0.1500) (-2.2575) (-0.6083)
R6 0.0736 0.0504 0.1648 -0.2490
(0.1810) (0.1531) (0.3159) (-0.5477)
R11 0.6897* 0.6954*** 0.3883 0.7384**
(1.9157) (2.6349) (1.1275) (2.5242)
REVERSAL 0.0545 0.0972 0.1351 -0.0475
(0.4830) (0.6860) (0.9039) (-0.3743)
ILLIQ 14.0004*** 7.0147*** 15.6915*** 9.9227***
(4.6180) (4.3324) (4.1800) (3.1114)
Constant 2.7235 -2.9074 14.7414* 8.2053
(0.2794) (-0.2815) (1.8231) (0.9364)
Empirical p-value 0.026 0.371
Adj-R2 0.0845 0.0811 0.1049 0.1118
Observations 99008 141899 141765 99007
Fama and MacBeth (1973) regressions of the stock return on the lagged independent variables in
high and low IV OL groups. The main independent variables include our main lottery-like stock
measure (SKEW N ESS), market beta (BET A), book-to-market ratio (BM ), natural logarithm of
market capitalization (M E), natural logarithm of stock price (P RICE), prior 6-month returns (R6),
prior 11-month returns (R11), long-term reversal (REV ERSAL) and illiquidity measure (ILLIQ)
of Amihud (2002). All variables are winsorized. Following Cleary (1999), we test the significance
difference of SKEW N ESS coefficient between the high and low IV OL groups. The results are
shown in the empirical p-value, which is obtained by 1000 bootstrap samples. The t-statistics are
adjusted by Newey and West (1987) method and reported in parentheses. Significance at the 1%, 5%,
and 10% levels is indicated by ***, **, and *, respectively.
30

Table 7 Portfolio analysis of investor sentiment
W52
SENTIMENT Low -0.77** -1.06*** -0.73*** -0.60** 0.04 0.81* 0.60
(-2.52) (-4.29) (-2.75) (-2.31) (0.10) (1.69) (1.13)
High -1.09*** -0.92*** -1.07*** -0.61*** -0.11 0.98*** 1.07***
(-5.33) (-4.92) (-5.08) (-2.98) (-0.40) (2.88) (3.12)
SENTIMENT Low -1.33*** -0.71* -0.38 -0.22 0.29 1.62*** 1.17*
(-3.50) (-1.70) (-1.01) (-0.63) (0.62) (2.65) (1.76)
High -0.78*** -0.75*** -0.95*** -0.27 0.34 1.11*** 1.21***
(-2.92) (-3.04) (-3.64) (-1.08) (0.85) (2.78) (3.11)
Note: We sort stocks into two groups based on the median of SEN T IM EN T . Then, in each
SEN T IM EN T group, we independently double sort stocks into 25 portfolios based on SKEW N ESS
and W 52. We report the return difference between the highest-skewness and lowest-skewness stocks
for each SEN T IM EN T -W 52 portfolio. We use monthly Fama-French 5-factors to obtain alphas.
The t-statistics are adjusted by the Newey and West (1987) method and reported in parentheses.
Significance at the 1%, 5%, and 10% levels is indicated by ***, **, and *, respectively.
31

Table 8 Regression analysis of investor sentiment
High SENTIMENT Low SENTIMENT

Far Near Far Near
Variables Return Return Return Return
SKEWNESS -0.4144*** -0.2607*** -0.2438 -0.2935**
(-6.6441) (-3.0317) (-1.3046) (-2.2163)
BETA -0.2857* -0.5557** 0.0981 -0.0117
(-1.7799) (-2.5505) (0.4813) (-0.0470)
BM -0.1201 0.0654 0.5740 0.5123
(-0.3342) (0.1995) (1.3986) (1.3007)
ME -4.2204 1.3335 1.7847 1.9120
(-1.3484) (0.3186) (0.4104) (0.4134)
PRICE -0.4085** -0.0497 -0.3391 -0.0218
(-2.0840) (-0.2436) (-0.9537) (-0.0688)
R6 -0.5464 -0.6974* 1.3151** 0.1489
(-1.2932) (-1.8273) (1.9945) (0.2520)
R11 0.6487** 0.4799** 0.3658 0.6855*
(2.4779) (2.0576) (0.7364) (1.6644)
REVERSAL -0.0767 -0.1013 0.1043 0.1373
(-1.1315) (-1.2351) (0.5749) (0.7780)
ILLIQ 16.4339*** 10.3080*** 10.1855*** 3.8813***
(3.9928) (3.3096) (3.6587) (4.7698)
Constant 14.5593 -2.8683 -3.8238 -4.6531
(1.4217) (-0.2090) (-0.2763) (-0.3175)
Empirical p-value 0.008 0.304
Adj-R2 0.0746 0.0774 0.1059 0.1031
Observations 142239 142295 80779 80841
Fama and MacBeth (1973) regressions of the stock return on the lagged independent variables in high
and low SEN T IM EN T groups. The main independent variables include our main lottery-like stock
measure (SKEW N ESS), market beta (BET A), book-to-market ratio (BM ), natural logarithm of
market capitalization (M E), natural logarithm of stock price (P RICE), prior 6-month returns (R6),
difference of SKEW N ESS coefficient between the high and low SEN T IM EN T groups. The results
are shown in the empirical p-value, which is obtained by 1000 bootstrap samples. The t-statistics are
adjusted by Newey and West (1987) method and reported in parentheses. Significance at the 1%, 5%,
and 10% levels is indicated by ***, **, and *, respectively.
32

Table 9 Capital gains overhang and under-reaction to news
(1) (2) (3) (4)

Return Return Return Return
SKEWNESS -1.0029** -0.8763*** -1.0452*** -0.9689***
(-2.0604) (-2.7009) (-2.6914) (-2.8910)
W52×SKEWNESS 0.9253* 0.7495** 0.9587** 0.8302**
(1.7853) (2.1123) (2.2532) (2.1895)
W52 0.8630 0.0469 0.5951 0.8956
(0.6577) (0.0584) (0.4992) (1.2346)
CGO×SKEWNESS 0.2103 0.6141
(0.5569) (1.6107)
CGO -1.6666*** -1.3272***
(-3.0605) (-3.5059)
R6×W52 -1.0776 0.4085
(-0.6149) (0.2748)
R6 0.0913 1.6800 0.2796
(0.2904) (1.1242) (0.2233)
BETA -0.4222*** -0.1903*
(-2.6102) (-1.6948)
BM 0.1905 0.1508
(0.8551) (0.6603)
ME -2.3104 -0.5226
(-0.8002) (-0.1858)
PRICE -0.2408 -0.3136*
(-1.2297) (-1.7481)
R11 0.9886*** 0.7289***
(3.9469) (3.2543)
REVERSAL 0.0417 0.0191
(0.7882) (0.3857)
ILLIQ 8.5685*** 8.1491***
(4.9757) (5.9195)
Constant -0.0594 8.2425 0.5503 2.2330
(-0.0421) (0.8849) (0.4252) (0.2433)
Adj-R2 0.0431 0.1098 0.0466 0.1084
Observations 390378 390378 481679 481679
Note: This table reports the times-series averages of cross-sectional regression coefficients after con-
trolling for the capital gains overhang and under-reaction to news. We run Fama and MacBeth (1973)
regressions of the stock return on the lagged independent variables. The main independent variables
include our main lottery-like stock measure (SKEW N ESS), nearness to 52-week high (W 52) and
its interaction term with SKEW N ESS, capital gains overhang (CGO) and its interaction term with
SKEW N ESS, prior 6-month returns (R6) and its interaction term with W 52, market beta (BET A),
book-to-market ratio (BM ), natural logarithm of market capitalization (M E), natural logarithm of
stock price (P RICE), prior 11-month returns (R11), long-term reversal (REV ERSAL) and illiquidity
measure (ILLIQ) of Amihud (2002). All variables are winsorized. The t-statistics are adjusted by
Newey and West (1987) method and reported in parentheses. Significance at the 1%, 5%, and 10%
levels is indicated by ***, **, and *, respectively.
33

Table 10 The impact of state ownership
SOE non-SOE SOE non-SOE

Far Near Far Near
Return Return Return Return Return Return
SKEWNESS -0.2885*** -0.3299*** -0.3751*** -0.2643*** -0.4252*** -0.2491**
(-4.1000) (-3.2315) (-5.3766) (-2.9886) (-3.1457) (-2.2914)
BETA -0.4123** -0.0501 -0.3807* -0.3851* 0.1244 -0.2389
(-2.1007) (-0.3650) (-1.8560) (-1.7942) (0.8839) (-1.1427)
BM 0.0847 0.4430 0.1470 0.1092 0.1951 0.7544**
(0.3260) (1.5116) (0.5309) (0.3768) (0.5759) (2.0137)
ME 0.3488 2.3645 -1.0799 2.6462 0.5739 4.4487
(0.1331) (0.6520) (-0.3806) (0.9781) (0.1661) (1.1174)
PRICE -0.2629 -0.1784 -0.3809* -0.1646 -0.4876** 0.1089
(-1.3997) (-0.8975) (-1.8435) (-0.7768) (-2.0825) (0.5459)
R6 -0.4096 0.1559 -0.8933 -0.4661 1.9459 -0.1424
(-0.9776) (0.4268) (-1.4819) (-0.8788) (1.6497) (-0.3663)
R11 0.3389 0.4223 0.4360 0.4200 0.9123*** 0.3798
(1.3140) (1.5569) (1.0086) (1.4021) (2.6058) (1.1426)
REVERSAL 0.0386 -0.2262 0.0615 0.0823 -0.0807 -0.4521*
(0.4278) (-1.6023) (0.5668) (0.4806) (-0.4814) (-1.6604)
ILLIQ 10.1348*** 9.5870*** 15.1123*** 7.1570*** 14.8446*** 8.9331***
(4.1406) (5.0935) (4.7806) (2.7755) (4.3526) (5.1487)
Constant 0.6090 -6.2243 4.8923 -6.4608 0.6132 -13.1292
(0.0727) (-0.5441) (0.5409) (-0.7425) (0.0564) (-1.0442)
Empirical p-value 0.258 0.148 0.044
Adj-R2 0.1034 0.0864 0.0942 0.0962 0.0868 0.0817
Observations 179901 213853 88819 91082 107715 106138
Fama and MacBeth (1973) regressions of the stock return on the lagged independent variables in SOE
and non-SOE groups. The main independent variables include our main lottery-like stock measure
(SKEW N ESS), market beta (BET A), book-to-market ratio (BM ), natural logarithm of market
capitalization (M E), natural logarithm of stock price (P RICE), prior 6-month returns (R6), prior 11-
month returns (R11), long-term reversal (REV ERSAL) and illiquidity measure (ILLIQ) of Amihud
(2002). All variables are winsorized. Following Cleary (1999), we test the significance difference
of SKEW N ESS coefficient between the SOE and non-SOE groups. The results are shown in the
empirical p-value, which is obtained by 1000 bootstrap samples. The t-statistics are adjusted by Newey
and West (1987) method and reported in parentheses. Significance at the 1%, 5%, and 10% levels is
indicated by ***, **, and *, respectively.
34

Table 11 Alternative composite lottery proxy
(1) All (2) All (3) Far (4) Near

Return Return Return Return
INDEX -1.5250*** -2.9511*** -3.2039*** -2.8131***
(-4.3584) (-13.4967) (-14.3848) (-10.2775)
BETA -0.1137 -0.0165 -0.2222
(-0.9084) (-0.1612) (-1.5209)
BM -0.0173 -0.0249 0.1502
(-0.0696) (-0.0911) (0.6107)
ME -2.8911 -3.4007 -1.2250
(-1.0085) (-1.2385) (-0.4196)
PRICE -0.8819*** -1.1763*** -0.6287***
(-4.6200) (-5.6574) (-3.1499)
R6 -0.1711 0.0090 -0.1833
(-0.5363) (0.0228) (-0.5624)
R11 0.6421*** 0.5377* 0.6835***
(2.8068) (1.9598) (2.8940)
REVERSAL -0.0041 0.0636 0.0104
(-0.0841) (0.6924) (0.1278)
ILLIQ 7.4940*** 11.4471*** 6.1530***
(5.4773) (5.1168) (4.4245)
Constant 1.8945*** 13.2915 15.4123* 7.7814
(3.1837) (1.4423) (1.7527) (0.8269)
Empirical p-value 0.035
Adj-R2 0.0150 0.1001 0.0970 0.0940
Observations 481679 481679 240772 240907
Fama and MacBeth (1973) regressions of the stock return on the lagged independent variables. The
main independent variables include the composite lottery proxy (IN DEX) following Kumar (2009),
market beta (BET A), book-to-market ratio (BM ), natural logarithm of market capitalization (M E),
natural logarithm of stock price (P RICE), prior 6-month returns (R6), prior 11-month returns (R11),
long-term reversal (REV ERSAL) and illiquidity measure (ILLIQ) of Amihud (2002). All variables
are winsorized. Following Cleary (1999), we test the significance difference of SKEW N ESS coefficient
between the far and near 52-week high groups. The results are shown in the empirical p-value, which is
obtained by 1000 bootstrap samples. The t-statistics are adjusted by Newey and West (1987) method
and reported in parentheses. Significance at the 1%, 5%, and 10% levels is indicated by ***, **, and
*, respectively.
35

Appendix A. Characteristic Definitions
IVOL: Following Ang, Hodrick, Xing, and Zhang (2006), we calculate idiosyncratic
volatility IV OL as the residual volatility from regressing a stock’s excess returns on the
Fama and French (1993) three factors.
SENTIMENT: Following Yi and Mao (2009), we use comprehensive sentiment index
CICSI as the measure of investor sentiment in the Chinese stock market. This index adopts
the leading and lagging variables of six indicators, closed-end fund discount (DCEF ), trad-
ing volume (T U RN ), IPO number (IP ON ), IPO return (IP OR), number of new investor
accounts (N IA) and consumer confidence index (CCI), to build an investor sentiment index
(cicsit) using the principal component analysis. Then select the six variables with the largest
cicsit correlation coefficient among the leading and lagging variables of above six indicators.
Finally, use the principal component analysis construct the comprehensive sentiment index
CICSI. The construction of CICSI is
CICSIt = 0.231DCEFt +0.224T U RNt−1 +0.257IP ONt +0.322IP ORt +0.268CCIt +0.405N IAt−1
(7)
If CICSI is greater than the time-series median, the investor sentiment is high and we
record SEN T IM EN T as 1, otherwise we record it as 0.
BETA: Estimated from month t − 60 to t − 1, and we require a minimum of 24 monthly
returns.
BM: The book equity divided by the market equity.
ME: The natural logarithm of price times shares outstanding.
PRICE: The natural logarithm of stock prices.
R6: The prior 6-month returns from month t − 7 to t − 2.
R11: The prior 11-month returns from month t − 12 to t − 2.
REVERSAL: The prior returns from month t − 60 to t − 13.
36

ILLIQ: The ratio of absolute daily stock return to daily trading volume over the past
month.
INIPROP: Institutional ownership ratio of each stock obtained from CSMAR.
CGO: Following Grinblatt and Han (2005), for each stock, at the end of each month, the
reference price is calculated using the weekly closing price and turnover rate of the past five
years
260 n−1
!
1X Y
RPi,t = Vi,t−n [1 − Vi,t−n+i ] Pi,t−n (8)
k
n=1 i=1
P Qn−1
where k = n Vi,t−n i=1 [1 − Vi,t−n+i ], Vi,t−n is the turnover rate of stock i in week
t − n and Pi,t−n is the closing price of stock i in week t − n. Then calculate the capital gains
overhang (CGO) as follows

Pi,t−1 − RPi,t
CGOi,t = (9)
Pi,t−1
When CGO is positive (negative), it means that most of the stock i in month t are in a
profit (loss) state.
SOE: If the company is a state-owned enterprise in year t, the SOE is 1, otherwise it is
0.
37

Appendix B. Empirical tables
Table B1 Variable correlations
Return W52 SKEWNESS BETA BM ME PRICE R6 R11 REVERSAL ILLIQ CGO IVOL SOE INIPROP
Return 1
W52 0.0021 1
SKEWNESS -0.0298 0.0913 1

BETA -0.0085 -0.1269 -0.0025 1
BM 0.0143 0.0847 -0.0251 0.0251 1
ME -0.0271 0.0305 0.0729 -0.0473 0.1051 1
PRICE -0.0265 0.2189 0.0848 -0.0943 -0.4336 0.1601 1
R6 -0.0052 0.5594 0.0337 0.0019 0.0354 0.0428 0.2740 1
R11 0.0008 0.4906 0.0449 0.0033 0.0063 0.1205 0.3313 0.6798 1
REVERSAL -0.0121 -0.0468 0.0329 -0.0143 -0.1941 0.2353 0.1979 -0.0281 -0.0359 1
ILLIQ 0.0425 -0.1389 -0.0490 -0.0085 -0.0888 -0.4842 -0.0774 -0.1617 -0.1833 -0.1301 1
CGO -0.0318 0.4268 0.0898 -0.0356 -0.0412 -0.0617 0.2996 0.3135 0.2735 0.0030 -0.1360 1
IVOL -0.0673 0.2015 0.2544 0.0786 -0.1495 -0.0962 0.1900 0.1966 0.1729 0.0031 -0.0615 0.2268 1
SOE -0.0082 0.0097 0.0012 0.0051 0.2449 0.1914 -0.1646 -0.0173 -0.0179 0.0391 -0.1136 -0.0110 -0.0925 1
INIPROP -0.0029 -0.0045 0.0005 0.0107 -0.0481 -0.1666 -0.0080 -0.0008 -0.0084 -0.0311 0.1261 -0.0005 0.0397 -0.0006 1
Note: This table reports the time-series average of cross-sectional correlations of various firm characteristics. A list of variables include the nearness
to the 52-week highest price (W52 ), total skewness (SKEWNESS ), market beta (BETA), book-to-market ratio (BM ), natural logarithm of market
38
capitalization (ME ), natural logarithm of stock price (PRICE ), prior 6-month returns (R6 ), prior 11-month returns (R11 ), long-term reversal (RE-
VERSAL), illiquidity measure (ILLIQ) as in Amihud (2002), capital gains overhang (CGO), idiosyncratic volatility (IVOL), state-owned enterprises
(SOE ) and institutional ownership (INIPROP ). The sample period is from January 2000 to December 2021, except for SOE (January 2003 to
December 2021).
Table B2 Portfolio analysis of capital gains overhang
W52
CGO Low -0.75*** -0.67*** -0.82*** -0.77*** 0.51 1.26*** 1.03**
(-4.09) (-3.93) (-3.97) (-2.89) (1.17) (2.64) (2.18)
High -0.92*** -1.23*** -0.89*** -0.45*** -0.04 0.88** 0.84**
(-3.64) (-6.26) (-4.96) (-2.75) (-0.20) (2.58) (2.33)
CGO Low -0.93*** -0.35 -0.60** -0.62** 0.25 1.18*** 0.75
(-4.14) (-1.64) (-2.42) (-2.05) (0.56) (2.59) (1.55)
High -0.86** -1.29*** -0.62** -0.23 0.32 1.18** 1.18***
(-2.47) (-4.25) (-2.20) (-0.99) (1.12) (2.48) (2.66)
Note: We sort stocks into two groups based on the median of CGO. Then, in each CGO group,
we independently double sort stocks into 25 portfolios based on SKEW N ESS and W 52. We report
the return difference between the highest-skewness and lowest-skewness stocks for each CGO-W 52
portfolio. We use monthly Fama-French 5-factors to obtain alphas. The t-statistics are adjusted by
the Newey and West (1987) method and reported in parentheses. Significance at the 1%, 5%, and
10% levels is indicated by ***, **, and *, respectively.
39

Table B3 Double-sort in different institutional ownership groups
Panel A: Low institutional ownership

SKEWNESS
W52
1(Far) 1.01 0.90 0.78 0.58 -0.09 -1.10*** (-5.43) -1.03*** (-5.00)
2 0.84 1.01 0.91 0.60 0.09 -0.75*** (-3.86) -0.78*** (-3.80)

3 1.05 0.76 0.94 0.65 0.05 -0.99*** (-4.75) -0.96*** (-4.32)
4 0.86 0.92 0.73 0.70 0.23 -0.64*** (-2.72) -0.58*** (-2.64)
5(Near) 0.51 0.43 0.59 0.16 0.30 -0.22 (-0.87) -0.20 (-0.73)
5-1: return -0.49 -0.47 -0.19 -0.43 0.39 0.89*** (2.92) 0.83*** (2.65)
t-statistic (-1.36) (-1.47) (-0.63) (-1.30) (1.26)
5-1: alpha -0.30 -0.17 0.08 -0.18 0.54
t-statistic (-0.81) (-0.50) (0.26) (-0.54) (1.54)
Panel B: High institutional ownership
40
SKEWNESS
W52
1(Far) 1.01 0.94 0.70 0.61 0.39 -0.62*** (-2.71) -0.60*** (-2.60)
2 1.27 1.18 0.80 0.62 0.21 -1.07*** (-5.11) -1.08*** (-5.33)
3 0.96 0.93 0.80 0.74 0.09 -0.87*** (-4.82) -0.84*** (-4.56)
4 1.17 1.15 0.73 0.60 0.67 -0.50** (-2.24) -0.55** (-2.23)
5(Near) 0.57 0.84 0.62 0.76 0.62 0.05 (0.17) 0.03 (0.10)
5-1: return -0.44 -0.09 -0.08 0.15 0.23 0.67** (1.96) 0.63* (1.71)
t-statistic (-1.18) (-0.24) (-0.23) (0.41) (0.53)
5-1: alpha -0.22 0.20 0.17 0.42 0.42
t-statistic (-0.57) (0.46) (0.42) (1.18) (0.98)
Note: We independently double sort the stocks into 25 portfolios based on total skewness (SKEW N ESS) and nearness to 52-week high (W 52)
in low and high institutional ownership groups. This table reports the equal-weighted portfolio returns by averaging the returns of stocks in each
portfolio. We use monthly Fama-French 5-factors to obtain alphas. The t-statistics are adjusted by the Newey and West (1987) method and reported
in parentheses. Significance at the 1%, 5%, and 10% levels is indicated by ***, **, and *, respectively.
Table B4 Double-sort in the pre-reform subsample

SKEWNESS
W52
1(Far) -0.21 -0.16 -0.42 -0.51 -0.91 -0.71*** (-3.17) -0.70*** (-2.82)
2 0.10 0.10 -0.08 -0.11 -0.47 -0.57*** (-3.09) -0.53** (-2.45)

3 0.19 -0.14 -0.03 0.13 -0.16 -0.36 (-1.42) -0.48** (-1.99)
4 0.21 0.31 0.05 -0.06 -0.04 -0.25 (-1.06) -0.24 (-0.91)
5(Near) -0.10 0.66 0.63 0.28 0.25 0.35 (0.91) 0.39 (0.82)
5-1: return 0.11 0.82* 1.05* 0.79 1.17** 1.06** (2.33) 1.09** (2.01)
t-statistic (0.24) (1.66) (1.89) (1.53) (2.24)
5-1: alpha 0.41 1.36** 1.44** 1.49** 1.50**
t-statistic (0.67) (2.23) (2.16) (2.39) (2.22)
41
SKEWNESS
W52
1(Far) -0.33 0.05 -0.44 -0.23 -1.16 -0.83*** (-2.81) -0.71* (-1.95)
2 0.07 0.36 0.26 -0.27 -0.01 -0.08 (-0.19) -0.04 (-0.11)
3 0.13 0.04 0.32 0.37 0.09 -0.04 (-0.10) -0.24 (-0.75)
4 0.71 0.76 0.06 0.35 0.43 -0.28 (-0.79) -0.26 (-0.73)
5(Near) 0.19 1.02 1.14 0.95 0.77 0.58 (1.35) 0.78* (1.67)
5-1: return 0.52 0.97* 1.57** 1.18** 1.94*** 1.41*** (2.79) 1.49** (2.56)
t-statistic (1.01) (1.70) (2.35) (2.15) (2.99)
5-1: alpha 0.72 1.49** 1.95*** 1.78*** 2.21***
t-statistic (1.05) (2.31) (2.71) (2.86) (2.84)
table reports the equal-weighted and value-weighted portfolio returns by averaging the returns of stocks in each portfolio in the pre-reform subsample
(from January 2000 to December 2006). We use monthly Fama-French 5-factors to obtain alphas. The t-statistics are adjusted by the Newey and
West (1987) method and reported in parentheses. Significance at the 1%, 5%, and 10% levels is indicated by ***, **, and *, respectively.
Table B5 Double-sort in the post-reform subsample

SKEWNESS
W52
1(Far) 1.36 1.13 0.97 0.81 0.31 -1.05*** (-4.78) -1.01*** (-4.58)
2 1.39 1.28 0.97 0.75 0.27 -1.11*** (-5.92) -1.13*** (-5.82)

3 1.19 1.14 1.16 0.78 0.15 -1.04*** (-5.48) -1.05*** (-5.39)
4 1.26 1.12 1.21 0.89 0.57 -0.69*** (-3.32) -0.66*** (-3.27)
5(Near) 0.77 0.65 0.63 0.57 0.52 -0.25 (-1.14) -0.23 (-1.00)
5-1: return -0.59 -0.47 -0.35 -0.24 0.21 0.80*** (2.68) 0.78** (2.54)
t-statistic (-1.62) (-1.34) (-1.01) (-0.63) (0.50)
5-1: alpha -0.41 -0.19 -0.08 0.00 0.36
t-statistic (-1.11) (-0.56) (-0.25) (0) (0.91)
42
SKEWNESS
W52
1(Far) 0.72 0.44 0.28 0.12 -0.40 -1.12*** (-4.11) -1.00*** (-3.33)
2 0.89 0.71 0.43 0.23 -0.13 -1.02*** (-4.12) -1.04*** (-4.01)
3 0.82 0.52 0.58 0.35 -0.09 -0.91*** (-3.82) -0.78*** (-3.06)
4 0.64 0.78 0.99 0.52 0.34 -0.30 (-1.16) -0.31 (-1.12)
5(Near) 0.43 0.31 0.52 0.44 0.56 0.13 (0.38) 0.08 (0.23)
5-1: return -0.29 -0.13 0.24 0.32 0.96** 1.25*** (3.26) 1.08*** (2.82)
t-statistic (-0.61) (-0.32) (0.53) (0.70) (1.98)
5-1: alpha 0.06 0.29 0.68 0.70* 1.14**
t-statistic (0.13) (0.68) (1.47) (1.65) (2.36)
Note: We independently double sort the stocks into 25 portfolios based on total skewness (SKEW N ESS) and nearness to 52-week high (W 52).
This table reports the equal-weighted and value-weighted portfolio returns by averaging the returns of stocks in each portfolio in the post-reform
subsample (from January 2007 to December 2021). We use monthly Fama-French 5-factors to obtain alphas. The t-statistics are adjusted by the
Newey and West (1987) method and reported in parentheses. Significance at the 1%, 5%, and 10% levels is indicated by ***, **, and *, respectively.
Table B6 Double-sort using SKEW N ESS and W 13

SKEWNESS
W13
1(Far) 1.47 1.33 1.26 1.06 0.36 -1.11*** (-5.45) -1.15*** (-5.54)
2 1.25 1.02 0.94 0.74 0.39 -0.86*** (-5.54) -0.75*** (-4.50)

3 0.93 0.94 0.77 0.69 0.36 -0.56*** (-3.49) -0.62*** (-3.26)
4 0.45 0.83 0.59 0.52 0.10 -0.35 (-1.33) -0.24 (-0.99)
5(Near) 0.13 0.16 0.22 -0.05 -0.03 -0.16 (-0.77) -0.19 (-0.89)
5-1: return -1.34*** -1.17*** -1.04*** -1.12*** -0.39 0.95*** (3.22) 0.96*** (3.21)
t-statistic (-4.30) (-3.54) (-3.51) (-3.49) (-1.17)
5-1: alpha -1.21*** -0.95*** -0.88*** -0.90*** -0.24
t-statistic (-3.72) (-2.94) (-2.98) (-2.77) (-0.80)
43
SKEWNESS
W13
1(Far) 1.35 1.14 0.84 0.63 0.15 -1.19*** (-4.44) -1.20*** (-4.32)
2 1.07 0.71 0.54 0.52 0.26 -0.82*** (-3.51) -0.60** (-2.56)
3 0.67 0.64 0.46 0.47 0.39 -0.28 (-1.18) -0.24 (-0.88)
4 0.59 0.60 0.46 0.63 0.21 -0.38 (-1.13) -0.39 (-1.23)
5(Near) 0.20 0.13 0.33 0.08 0.22 0.02 (0.07) -0.04 (-0.15)
5-1: return -1.15*** -1.00*** -0.51 -0.55 0.06 1.21*** (3.13) 1.16*** (3.03)
t-statistic (-2.93) (-2.66) (-1.31) (-1.59) (0.16)
5-1: alpha -0.93** -0.59* -0.27 -0.30 0.23
t-statistic (-2.41) (-1.74) (-0.72) (-0.85) (0.63)
table reports the equal-weighted and value-weighted portfolio returns by averaging the returns of stocks in each portfolio. We use monthly Fama-
French 5-factors to obtain alphas. The t-statistics are adjusted by the Newey and West (1987) method and reported in parentheses. Significance at
the 1%, 5%, and 10% levels is indicated by ***, **, and *, respectively.

SKEWNESS
W26
1(Far) 1.08 1.04 0.79 0.59 0.07 -1.01*** (-5.76) -0.96*** (-5.21)
2 0.89 0.74 0.78 0.45 0.07 -0.82*** (-5.95) -0.85*** (-5.74)

3 0.69 0.70 0.42 0.45 0.06 -0.63*** (-3.51) -0.63*** (-3.61)
4 0.63 0.60 0.71 0.53 0.26 -0.37** (-2.07) -0.39** (-2.07)
5(Near) 0.20 0.27 0.35 0.15 0.14 -0.06 (-0.27) -0.04 (-0.19)
5-1: return -0.88*** -0.77** -0.44 -0.44 0.07 0.96*** (3.73) 0.91*** (3.42)
t-statistic (-3.32) (-2.43) (-1.48) (-1.63) (0.24)
5-1: alpha -0.73*** -0.52 -0.29 -0.24 0.19
t-statistic (-2.60) (-1.49) (-0.86) (-0.85) (0.57)
44
SKEWNESS
W26
1(Far) 0.81 0.76 0.43 0.23 -0.20 -1.02*** (-4.38) -0.89*** (-3.82)
2 0.66 0.46 0.38 0.19 0.05 -0.61** (-2.44) -0.56** (-2.26)
3 0.48 0.58 0.31 0.36 0.05 -0.43* (-1.94) -0.41* (-1.76)
4 0.55 0.47 0.72 0.65 0.46 -0.09 (-0.40) -0.20 (-0.99)
5(Near) 0.24 0.29 0.54 0.41 0.55 0.31 (1.13) 0.32 (1.19)
5-1: return -0.57* -0.47 0.11 0.18 0.75** 1.32*** (4.05) 1.21*** (3.82)
t-statistic (-1.73) (-1.43) (0.31) (0.58) (1.96)
5-1: alpha -0.37 -0.18 0.24 0.40 0.84**
t-statistic (-1.09) (-0.49) (0.64) (1.19) (2.10)
table reports the equal-weighted and value-weighted portfolio returns by averaging the returns of stocks in each portfolio. We use monthly Fama-

SKEWNESS
W104
1(Far) 1.19 1.05 0.86 0.82 0.30 -0.89*** (-4.92) -0.80*** (-4.29)
2 1.09 1.09 0.93 0.77 0.37 -0.71*** (-4.11) -0.70*** (-4.54)

3 1.09 1.04 1.02 0.73 0.31 -0.78*** (-5.17) -0.72*** (-4.47)
4 1.16 1.00 0.93 0.74 0.39 -0.77*** (-4.48) -0.81*** (-4.49)
5(Near) 0.60 0.80 0.75 0.69 0.67 0.07 (0.38) 0.11 (0.61)
5-1: return -0.59** -0.25 -0.11 -0.13 0.37 0.96*** (4.09) 0.92*** (3.62)
t-statistic (-2.04) (-0.96) (-0.36) (-0.46) (1.20)
5-1: alpha -0.37 -0.02 0.10 0.09 0.55
t-statistic (-1.12) (-0.06) (0.30) (0.32) (1.61)
45
SKEWNESS
W104
1(Far) 0.63 0.58 0.35 0.41 -0.13 -0.75*** (-3.56) -0.59** (-2.48)
2 0.71 0.54 0.53 0.54 0.03 -0.69*** (-2.93) -0.65*** (-2.94)
3 0.73 0.64 0.58 0.45 0.12 -0.61*** (-3.09) -0.49** (-2.28)
4 0.95 0.78 0.98 0.50 0.22 -0.73*** (-3.09) -0.76*** (-3.08)
5(Near) 0.43 0.82 0.70 0.73 0.78 0.35 (1.38) 0.48* (1.95)
5-1: return -0.20 0.24 0.35 0.32 0.90** 1.10*** (3.77) 1.07*** (3.47)
t-statistic (-0.57) (0.76) (0.95) (0.93) (2.55)
5-1: alpha 0.06 0.54 0.66 0.56 1.13***
t-statistic (0.15) (1.63) (1.61) (1.51) (2.78)
Note: We independently double sort the stocks into 25 portfolios based on total skewness (SKEW N ESS) and nearness to 104-week high (W 104).
This table reports the equal-weighted and value-weighted portfolio returns by averaging the returns of stocks in each portfolio. We use monthly Fama-
Table B9 Regression analysis of different anchor values
W13 W26 W104

Far Near Far Near Far Near
Return Return Return Return Return Return
SKEWNESS -0.3026*** -0.2151*** -0.3151*** -0.2386*** -0.3300*** -0.2331***
(-3.1929) (-2.8486) (-3.5604) (-2.8003) (-3.4712) (-3.0790)
BETA -0.1060 -0.2948** -0.0824 -0.3528** -0.0923 -0.2941*
(-0.8027) (-2.0491) (-0.8042) (-2.3246) (-0.8247) (-1.9659)
BM 0.0360 0.3966 0.0870 0.3139 0.0496 0.3138
(0.1340) (1.5755) (0.3148) (1.2873) (0.2051) (1.1753)
ME -1.7521 -0.7850 -1.4387 0.0204 -2.0869 0.3997
(-0.6258) (-0.2623) (-0.5147) (0.0071) (-0.7298) (0.1363)
PRICE -0.4658** -0.1505 -0.5766*** -0.0941 -0.6514*** -0.0795
(-2.5158) (-0.8013) (-3.0282) (-0.5058) (-3.3447) (-0.4347)
R6 -0.4535 0.2814 0.5446 -0.0083 -0.5664 -0.1021
(-0.9885) (0.9093) (1.0341) (-0.0266) (-1.0345) (-0.3342)
R11 0.6622*** 0.5873** 0.4724** 0.6791*** 0.8050*** 0.5401**
(2.6867) (2.4792) (2.0045) (2.7478) (2.8369) (2.4646)
REVERSAL 0.0291 0.0248 0.0655 -0.0098 0.0844 -0.0050
(0.3685) (0.2906) (0.7942) (-0.1362) (0.9469) (-0.0666)
ILLIQ 10.9283*** 7.8275*** 11.5479*** 7.0553*** 11.2834*** 7.0682***
(4.9298) (4.9711) (4.6808) (4.9197) (4.8088) (4.8500)
Constant 7.0843 3.6282 6.6848 1.1227 8.3740 -0.1294
(0.7925) (0.3778) (0.7442) (0.1215) (0.9199) (-0.0137)
Empirical p-value 0.059 0.078 0.041
Adj-R2 0.0965 0.0950 0.0939 0.0933 0.0938 0.0895
Observations 240772 240907 240772 240907 240772 240907
Fama and MacBeth (1973) regressions of the stock return on the lagged independent variables in the far
and near 13-, 26-, 104-week high groups. The main independent variables include our main lottery-like
stock measure (SKEW N ESS), market beta (BET A), book-to-market ratio (BM ), natural logarithm
of market capitalization (M E), natural logarithm of stock price (P RICE), prior 6-month returns (R6),
difference of SKEW N ESS coefficient between the far and near 13-, 26-, 104-week high groups. The
results are shown in the empirical p-value, which is obtained by 1000 bootstrap samples. The t-
statistics are adjusted by Newey and West (1987) method and reported in parentheses. Significance
at the 1%, 5%, and 10% levels is indicated by ***, **, and *, respectively.
46

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THE ROLE OF ANCHORING ON INVESTORS’ GAMBLING

PREFERENCE: EVIDENCE FROM CHINA

ZHUO WANG† , ZIYUE WANG† , AND KE WU†

This draft: August 7, 2022.

Wang: zhuo.wang@ruc.edu.cn; Wang: ziyuewang_ruc@163.com ; Wu: ke.wu@ruc.edu.cn

Electronic copy available at: https://ssrn.com/abstract=4178162

news, firm’s ownership status, and China’s non-tradable share reform.

Keywords: gambling preference; anchoring effect; limit to arbitrage; investor sentiment;

Chinese stock market

JEL classification: G02; G12; G14

Electronic copy available at: https://ssrn.com/abstract=4178162

but weaker or even disappears otherwise.

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identify lottery stocks2.

and during periods when investor sentiment is high.

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is affected by the psychological barrier of investors.

skewness and 52-week high price persists.

effect of 52-week high price on the skewness anomaly.

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In addition, we explore the influence of some institution-specific characteristics in the

weakened for the state-owned enterprises and in the post-reform periods.

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robust to the alternative anchor measures.

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shows various robustness tests. Section V concludes the paper.

II. Data and variables construction

with 481679 month-stock level observations.

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stock i in month t, we calculate the W52 as

barrier effect of investors.

We also consider various characteristics in the empirical analyses, including idiosyncratic

characteristics are provided in the appendix A.

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[Insert Table 1 about here]

III. Empirical Results

influence of investor sentiment.

III.1. Skewness anomaly.

return by averaging (equal-weighted or value-weighted) returns in each portfolio. Table 2

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statistically and economically significant negative abnormal returns.

[Insert Table 2 about here]

In addition, to control for various firm specific characteristics, we conduct Fama-MacBeth

III.2. Psychological barrier and skewness.

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52-week high price.

returns and Fama-French 5-factor risk-adjusted alphas of equal-weighted portfolios. For s-

price is much lower than the 52-week high price.

[Insert Table 3 about here]

In addition, to control for various firm characteristics, we also conduct Fama-MacBeth

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Ri,t+1 = λ0 + λ1 SKEW N ESSi,t + λ2 W 52i,t + λ3 W 52i,t × SKEW N ESSi,t

+ λ4 BET Ai,t + λ5 BMi,t + λ6 M Ei,t + λ7 P RICEi,t + λ8 R6i,t (3)

+ λ9 R11i,t + λ10 REV ERSALi,t + λ11 ILLIQi,t + εi,t+1

skewness anomaly is affected by the psychological barrier of investors.

[Insert Table 4 about here]

III.3. Limit to arbitrage.

would be stronger among stocks that facing high arbitrage risk.

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value-weighted portfolios shown in panel B also display similar patterns.

[Insert Table 5 about here]

Electronic copy available at: https://ssrn.com/abstract=4178162

[Insert Table 6 about here]