Lottery demand and the asset growth anomaly

The negative relation between asset growth (AG) and future stock returns is particularly featured by the overvaluation of high AG stocks. We propose that such overvaluation is attributed to investors’ lottery demand toward stocks with high maximum daily returns (MAX), resulting in higher AG premium among high MAX stocks. Our empirical results confirm this prediction. Further evidence indicates that the impact of lottery preference on the AG anomaly is robust to several alternative explanations, including overinvestment, limits-to-arbitrage, and the q-theory. Our study provides a new insight into the understanding of the AG anomaly. © 2022 Elsevier Inc.