This paper dissects the lottery-like anomaly in Chinese A-share stocks by decomposing total stock returns into overnight and intraday returns. Our findings indicate that the negative overnight returns are concentrated among lottery-like stocks, and the lottery-like anomaly is mainly driven by the overnight returns component. Considering the unique Chinese institutional features, our mechanism analysis reveals that the overnight returns induced lottery-like anomaly is more pronounced in stocks with high retail investors' gambling preference and high limits of arbitrage. Overall, our results suggest that investors optimism and trading constraints have a substantial impact on market efficiency in China.

Imposed trading constraints act as an exogenous source of illiquidity, prevent free trading of restricted shares and make them be priced at a discount relative to their freely-traded counterparts with identical dividends and voting rights from the same listed firms. This paper numerically solves the theoretical illiquidity discounts for the case of long constraint horizons and then reconciles the contradictions in the results of various frameworks by identifying the effects of the unlimited and costless borrowings assumed in Longstaff (2001). With control of leveraged positions, illiquidity discounts increase with the volatility, and their size is greatly diminished. We also empirically test the theories within the unique setting of China, which has virtually the largest population of restricted shares worldwide. Large discounts are documented in two forms of transactions in restricted shares: namely auctions and transfers. The results empirically verify the theoretical findings by showing that illiquidity discounts in auctions increase with both the volatility and constraint horizons. The results from transfers, however, are not significant as the transfers are made privately and may be subject to price manipulation when the involved parties are related.

We investigate considerations (compensations) paid in on-going Division Reform, a process of releasing trading constraint, in China Stock Market, and link this event with existing literature of restricted asset by inferring implied illiquidity discount of restricted shares from consideration. We also propose a new measure of restriction capturing multiple dimensions of restriction finding it together with the scale of restriction well explain the ratio of considerations and the implied illiquidity discount. We also use theoretical models to justify the 20% implied illiquidity discount and find it is below the 48.67% upper bound suggested by Longstaff (1995) and it falls within the range between 12.18% and 23.82% suggested by Lonstaff (2001) concluding the considerations paid in Division Reform is adequate and relative wealth of two classes of shareholders remains after the trading constraint released.