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Why do mutual funds hold lottery stocks?

Author

Listed:
  • Agarwal, Vikas
  • Jiang, Lei
  • Wen, Quan

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.

Suggested Citation

  • Agarwal, Vikas & Jiang, Lei & Wen, Quan, 2020. "Why do mutual funds hold lottery stocks?," CFR Working Papers 20-08, University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:2008
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    References listed on IDEAS

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    2. Gupta, Nilesh & Mishra, Anil V & Jacob, Joshy, 2022. "Prospect theory preferences and global mutual fund flows," Journal of International Money and Finance, Elsevier, vol. 125(C).
    3. Chen, Dongxu & Wu, Ke & Zhu, Yifeng, 2022. "Stock return asymmetry in China," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).

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    More about this item

    Keywords

    lottery stocks; risk shifting; fund performance; investor flows; stock mispricing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    NEP fields

    This paper has been announced in the following NEP Reports:

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