Shipping stocks as lotteries

ABSTRACT While shipping stocks are risky investments, their realized returns are found to be consistently lower than expectations derived from a mean-variance framework. The objective of the paper is to examine whether additional characteristics of the return distribution, in particular, extreme positive (maximum) return, are significant in the pricing of shipping stocks. Using U.S. data of publicly listed firms, we find that shipping stocks with a higher daily maximum return in the previous month exhibit significantly lower subsequent returns, suggesting that investors are willing to pay a higher price and accept a lower expected return for such stocks. Our results are robust at portfolio and firm levels after controlling for a barrage of risk factors. Consistent with prospect theory, we corroborate evidence of preference among shipping investors towards lottery-like payoffs. The implications of our work are relevant to investment managers who consider including shipping stocks in their portfolios, to investment bankers providing valuations for the pricing of shipping initial and secondary public offerings, or for mergers and acquisitions, and to shipping firms seeking to estimate their cost of capital in the context of investment appraisal.