Finance

Business

Stock (firearms)

Corporate governance

Engineering

Open-end fund

Economics

Microeconomics

Market liquidity

Institutional investor

Lottery

Portfolio

Fund of funds

Global assets under management

Monetary economics

Preference

Closed-end fund

Passive management

Mechanical engineering

Journal of Financial and Quantitative Analysis

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.

Why Do Mutual Funds Hold Lottery Stocks?