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 investors’ behavior in accelerating the lottery premium, we propose that investors’ social preference toward corporate social responsibility (CSR) could alleviate the underperformance of lottery-like stocks. Using a sample consisting of all Chinese listed A-share stocks, we show that the negative relation between lottery preference and stock returns exists only among stocks without CSR engagement or with poor CSR performance. We further show that better CSR performance and higher institutional ownership mitigate the overpricing of lottery-like stocks. Our research contributes to the CSR literature by showing that behaving in socially responsible ways could avoid stock prices being overpriced when the stock exhibits lottery-like payoffs