Why Do Mutual Funds Hold Lottery Stocks?

44 Pages Posted: 18 Apr 2018 Last revised: 7 Aug 2018

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: April 16, 2018

Abstract

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

Agarwal, Vikas and Jiang, Lei and Wen, Quan, Why Do Mutual Funds Hold Lottery Stocks? (April 16, 2018). 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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