Why Do Mutual Funds Hold Lottery Stocks?

57 Pages Posted: 18 Apr 2018 Last revised: 1 Jul 2020

See all articles by Vikas Agarwal

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Lei Jiang

Tsinghua University

Quan Wen

Georgetown University - Department of Finance

Date Written: May 1, 2019

Abstract

We provide new evidence that mutual funds hold lottery stocks to attract capital through two channels. First, funds with higher managerial ownership invest less in lottery stocks suggesting that managers themselves do not prefer to hold such stocks. Instead, fund investors prefer lottery stocks as funds with more lottery holdings attract more flows after portfolio disclosure compared to their peers. Second, poorly performing funds tend to increase their lottery holdings towards year-ends to engage in risk shifting and benefit from convex flow-performance relation. Aggregate lottery holdings of funds have asset pricing implications as it exacerbates the overpricing of lottery stocks.

Keywords: lottery stocks, risk shifting, fund performance, investor flows, stock mispricing

JEL Classification: G11, G23

Suggested Citation

Agarwal, Vikas and Jiang, Lei and Wen, Quan, Why Do Mutual Funds Hold Lottery Stocks? (May 1, 2019). Georgetown McDonough School of Business Research Paper No. 3164692. Available at SSRN: https://ssrn.com/abstract=3164692 or http://dx.doi.org/10.2139/ssrn.3164692

Vikas Agarwal (Contact Author)

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://www.gsu.edu/~fncvaa

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

Lei Jiang

Tsinghua University ( email )

Beijing, 100084
China

Quan Wen

Georgetown University - Department of Finance ( email )

37th and O Street, NW
Washington D.C., DC 20057
United States

HOME PAGE: http://faculty.georgetown.edu/qw50

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