Risk Shifting Versus Risk Management: Investment Policy in Corporate Pension Plans
Joshua D. Rauh
Stanford Graduate School of Business; National Bureau of Economic Research (NBER)
June 24, 2007
The asset allocation of defined benefit pension plans is a setting where both risk shifting and risk management incentives are likely be present. Empirically, firms with poorly funded pension plans and weak credit ratings allocate a greater share of pension fund assets to safer securities such as government debt and cash, whereas firms with well-funded pension plans and strong credit ratings invest more heavily in equity. These relations hold both in the cross-section and within firms and plans over time. The incentive to limit costly financial distress plays a considerably larger role than risk shifting in explaining variation in pension fund investment policy among U.S. firms.
Number of Pages in PDF File: 61
Keywords: Risk Shifting, Risk Management, Pensions, Asset Allocation
JEL Classification: G31, G32, G23, G39
Date posted: September 20, 2006
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