Why Do Mutual Funds Hold Lottery Stocks?
58 Pages Posted: 18 Apr 2018 Last revised: 11 May 2019
Date Written: May 2019
Funds holding more lottery stocks significantly underperform their peers. These funds are smaller, younger, and poor recent performers -- characteristics typically associated with their incentives to attract capital. Employing a difference-in-differences approach, we find that funds with more lottery stocks attract more flows after portfolio disclosure compared to their peers. Funds with higher managerial ownership invest less in lottery stocks suggesting that managers do not prefer such stocks. Finally, poorly performing funds tend to increase their lottery holdings towards year-ends. We provide new evidence of funds holding lottery stocks to gather assets by catering to investor preferences and engaging in risk shifting.
Keywords: lottery stocks, agency problems, risk shifting, performance, investor flows
JEL Classification: G11, G23
Suggested Citation: Suggested Citation