Why do Investors Like Short-Leg Securities? Evidence from a Textual Analysis of Buy Recommendations

In one sentence

Our paper advocates for text-based methods as a complementary tool to investor surveys for extracting investor perceptions, and helps explain what causes the seeming overpricing (and low subsequent returns) of short-leg securities.

Summary

We analyze analyst reports and online stock opinion articles that recommend investors buy short-leg securities to better understand what draws investors to short-leg securities despite their well-documented poor average long-run performance. Textual analysis indicates that buy recommendations mostly emphasize lottery-like characteristics. We validate the text-based inferences through a one-time survey of institutional and retail investors. Our results suggest that lottery considerations are an important determinant of investor interest in short-leg securities and short-leg securities’ high prices and low future returns.

Research topics