Why Do Mutual Funds Hold Lottery Stocks?

Georgetown McDonough School of Business Research Paper No. 3164692

Journal of Financial and Quantitative Analysis, Forthcoming

56 Pages Posted: 18 Apr 2018 Last revised: 7 Oct 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: October 2, 2020

Abstract

We provide evidence regarding mutual funds' motivation to hold lottery stocks. Funds with higher managerial ownership invest less in lottery stocks, suggesting that managers themselves do not prefer such stocks. The evidence instead supports that managers cater to fund investors' preference for such stocks. In particular, funds with more lottery holdings attract larger flows after portfolio disclosure compared to their peers, and poorly performing funds tend to engage in risk shifting by increasing their lottery holdings towards year-ends. Funds' aggregate holdings of lottery stocks contribute to their overpricing.

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? (October 2, 2020). Georgetown McDonough School of Business Research Paper No. 3164692, Journal of Financial and Quantitative Analysis, Forthcoming, 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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