Does Performance Ranking Affect Mutual Funds’ Investment in Lottery Stock?

Document Type

Article

Publication Date

7-1-2021

Publication Title

China Journal of Econometrics

Abstract

With a sample of actively managed open-end mutual funds in China (including equity funds and stock-oriented hybrid funds) from 2005 to 2017, we study the impact of fund’s past performance on the proportion of fund asset invested in lottery stocks. Our empirical analysis shows that there is a causal relationship between the fund’s investments in lottery stocks and fund performance relative to other funds. That is, the lower the ranks of fund performance, the greater proportion of fund asset invested in lottery stocks. This phenomenon is more obvious when it is near to the year-end and when the stock market is on the down trend. Further, funds with long-term under-performance allocate more capital to lottery stocks. These results are robust to various proxies for fund performance. We also find that the incentive to invest in lottery stocks is higher for solo managers, managers who invest less of their own money in the funds, and managers whose tenure is shorter than the average tenure of their predecessors.

Department

Economics and Finance

Volume Number

1

Issue Number

3

First Page

670

Last Page

693

DOI

10.12012/CJoE2020-0024

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