Why Do Investors Like Short-leg Securities? Evidence from a Textual Analysis of Buy Recommendations
The Review of Financial Studies, 38(12), 3729–3767 (2025).
Our paper examines analyst reports and online stock opinion articles, which recommend investors buy stocks that, based on prior literature, trade at comparatively high prices and earn low future returns (“short-leg securities”). We conduct textual analysis and test whether the justifications provided in these buy recommendations primarily (1) emphasize a stock’s safe-haven quality, (2) indicate general investor exuberance, or (3) highlight a stock’s lottery-like features. We find that the buy recommendations mostly emphasize stocks’ lottery-like characteristics. We subsequently validate our text-based inferences through a one-time survey of actual institutional and retail investors with long positions in short-leg securities. Overall, our results suggest that perceived lottery-like features play a material role in explaining why investors like and invest in stocks that reside in short legs of anomalies.