Why Do Mutual Funds Hold Lottery Stocks?
44 Pages Posted: 18 Apr 2018 Last revised: 7 Aug 2018
Date Written: April 16, 2018
We document large cross-sectional differences in lottery stock holdings among actively managed U.S. equity funds. Funds that hold more lottery stocks are smaller, younger, and poor recent performers - characteristics typically associated with their incentives to attract capital. Funds with more retail clientele and lower managerial ownership hold more lottery stocks. Poorly performing funds tend to increase their lottery holdings towards the end of the year. Funds with higher lottery holdings significantly underperform their peers by 4.8% annually. Our fi ndings provide new evidence of funds holding lottery stocks to gather assets by catering to investor preferences and engaging in risk-shifting behavior.
Keywords: lottery stocks, agency problems, risk shifting, performance, investor flows
JEL Classification: G11, G23
Suggested Citation: Suggested Citation