Why Do Mutual Funds Hold Lottery Stocks?
57 Pages Posted: 18 Apr 2018 Last revised: 1 Jul 2020
Date Written: May 1, 2019
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
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