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Why Do Mutual Funds Hold Lottery Stocks?

Published online by Cambridge University Press:  08 April 2021

Vikas Agarwal Open the ORCID record for Vikas Agarwal [Opens in a new window] ,
Lei Jiang  and
Quan Wen
Vikas Agarwal
Affiliation:
Georgia State University Robinson College of Businessvagarwal@gsu.edu
Lei Jiang*
Affiliation:
Tsinghua University School of Economics and Management
Quan Wen
Affiliation:
Georgetown University McDonough School of Businessquan.wen@georgetown.edu
*
jianglei@sem.tsinghua.edu.cn (corresponding author)
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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 with their peers, and poorly performing funds tend to engage in risk shifting by increasing their lottery holdings toward year-ends. Funds’ aggregate holdings of lottery stocks contribute to their overpricing.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 3 , May 2022 , pp. 825 - 856
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank Hendrik Bessembinder (the editor) and Roger Edelen (the referee) for their insightful and constructive feedback. We thank Rishabh Khurana and Chenglu Zhang for their excellent research assistance. We thank Turan Bali, Justin Birru, Chuck Buker, Sandeep Dahiya, Rui Dai, Kent Daniel, Freda Song Drechsler, Wayne Ferson, Vyacheslav (Slava) Fos, Egemen Genc, Bing Han, Ron Kaniel, Donald Keim, Clark Liu, Pedro Matos, David Mclean, Scott Murray, Sugata Ray, Honglin Ren, Matthew Ringgenberg, Clemens Sialm, and Xuemin Yan for their helpful comments and constructive suggestions. We also benefited from the comments received at presentations at the Baruch College, Baylor University, the Central University of Finance and Economics, Erasmus University, Georgia State University, Georgetown University, Renmin University, the Indian School of Business, the Indira Gandhi Institute of Development Research, the Tsinghua Finance Workshop, the University of California at Riverside, the University of Houston, the University of North Carolina at Charlotte, the University of Virginia (Darden), and the WRDS Advanced Research Scholar Program in the Wharton School at the University of Pennsylvania. Jiang gratefully acknowledges financial support from Tsinghua University Initiative Scientific Research Program, the National Science Foundation of China (71572091), and Tsinghua National Laboratory for Information Science and Technology. Agarwal would also like to thank the Centre for Financial Research (CFR) in Cologne for its continued support. We thank Linlin Ma and Yuehua Tang for sharing the managerial ownership data.

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