Social Interactions and Lottery Stock Mania

This paper provides novel evidence that social interactions are associated with both increased likelihood of a stock becoming more lottery-like and with greater investor overoptimism about the lottery characteristic. We find that heightened social media activity about a stock positively predicts the probability of an extreme daily price run-up, a {\it lottery event}. Lottery event stocks subject to more intense social media discussions subsequently experience greater buying pressure from retail investors, particularly Robinhood users, followed by lower later returns. Moreover, lottery stocks of firms located in socially well-connected counties experience lower subsequent returns than those in less-connected counties, and households in counties highly connected to the firms' headquarters counties are more likely to buy these stocks. Our findings suggest that social interactions contribute to the formation of asset price bubbles.