Why Do Mutual Funds Hold Lottery Stocks?



We document large cross-sectional differences in lottery stock holdings among actively managed U.S. equity funds. Funds that hold more lottery stocks are smaller, younger, and poor recent performers - characteristics typically associated with their incentives to attract capital. Funds with more retail clientele and lower managerial ownership hold more lottery stocks. Poorly performing funds tend to increase their lottery holdings towards the end of the year. Funds with higher lottery holdings significantly underperform their peers by 4.8% annually. Our findings provide new evidence of funds holding lottery stocks to gather assets by catering to investor preferences and engaging in risk-shifting behavior.