Are Stocks in New Industries Like Lottery Tickets?

Gerald Dwyer and Cora Barnhart
Working Paper 2002-15
August 2002

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We examine the distribution of returns in new industries to determine whether stocks in new industries are similar to lottery tickets. We focus on one characteristic of lottery tickets: negative expected returns. We examine data from the United States on sellers of own-brand personal computers, airlines and airplane manufacturers, automobile manufacturers, railroads, and telegraphs. A relatively small number of companies generate outstanding returns in some industries. We find no evidence of low expected returns. On the contrary, firms in new industries typically have high volatility of individual stocks’ returns and high expected returns relative to indexes for the same periods. None of our evidence suggests that investors reasonably might expect to pay to play when investing in new industries.

JEL classification: G10, G12

Keywords: stock prices, returns, lottery

The authors gratefully acknowledge Mark Fisher and other members of a brown bag lunch at the Federal Reserve Bank of Atlanta for comments that substantially improved the paper. They also thank Scott Hein, Cesare Robotti, and Paula Tkac for helpful comments on earlier drafts. The authors have received helpful comments in presentations at the Bank of Finland, the City University Business School in London, EDHEC, the Universidad Carlos III de Madrid, and the Tor Vergata Financial Conference. Shalini Patel provided excellent research assistance, and Linda Mundy put everything together. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Gerald P. Dywer Jr., Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-7095, fax 404-498-8810,, or Cora Barnhart, Rinker School of Business, Palm Beach Atlantic University, 901 S. Flagler Drive, West Palm Beach, Florida 33401, 561-803-2484, fax 561-803-2467,