Reference-Dependent Preferences for Lottery-Like Stocks: Cash Flow Risk and Credit Market Conditions

TY - JOUR

T1 - Reference-Dependent Preferences for Lottery-Like Stocks

T2 - Cash Flow Risk and Credit Market Conditions

AU - Li, Xiafei

AU - Luo, Di

AU - Reber, Beat

N1 - Publisher Copyright: © 2026 Portfolio Management Research. All rights reserved.

PY - 2026/6/30

Y1 - 2026/6/30

N2 - Existing literature reports the financial distress risk anomaly that stocks with low financial distress risk outperform stocks with high financial distress risk. The authors find that the anomaly is much more pronounced among distressed stocks with high cash flow risk or in bad credit times. Furthermore, the significant impact of distress risk on expected stock returns is not systematic for all stocks but is only for stocks with high cash flow risk in bad credit times. The authors show that distressed stocks with high cash flow risk or bad credit times have extremely strong lottery features. Their results indicate that the distress risk anomaly and the impact of distress risk on expected stock returns are mainly driven by these lottery-like stocks. Their findings are consistent with the reference-dependent preferences theory that investors’ preferences for lottery-like distressed stocks depend on cash flow risk and credit market conditions.

AB - Existing literature reports the financial distress risk anomaly that stocks with low financial distress risk outperform stocks with high financial distress risk. The authors find that the anomaly is much more pronounced among distressed stocks with high cash flow risk or in bad credit times. Furthermore, the significant impact of distress risk on expected stock returns is not systematic for all stocks but is only for stocks with high cash flow risk in bad credit times. The authors show that distressed stocks with high cash flow risk or bad credit times have extremely strong lottery features. Their results indicate that the distress risk anomaly and the impact of distress risk on expected stock returns are mainly driven by these lottery-like stocks. Their findings are consistent with the reference-dependent preferences theory that investors’ preferences for lottery-like distressed stocks depend on cash flow risk and credit market conditions.

UR - https://www.scopus.com/pages/publications/105045646049

U2 - 10.3905/jpm.2026.018

DO - 10.3905/jpm.2026.018

M3 - Article

AN - SCOPUS:105045646049

SN - 0095-4918

VL - 52

SP - 122

EP - 144

JO - The Journal of Portfolio Management

JF - The Journal of Portfolio Management

IS - 8

ER -