Asset Allocation and Managerial Assumptions in Corporate Pension Plans

60 Pages Posted: 18 Nov 2010

See all articles by Jawad M. Addoum

Jawad M. Addoum

Cornell University

Jules H. van Binsbergen

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Michael W. Brandt

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Date Written: November 16, 2010

Abstract

We empirically examine the effect of regulations on pension decision-making. We find that in the face of mandatory contributions, pension plans alter their asset allocations and increase their risk taking to avoid mandatory contributions. This behavior resembles gambling for resurrection. The economic effects we document are large, representing annual active reallocations of over $103M for the average plan. We also examine the effect of regulations on pension accounting assumptions affecting net income. We find that plan sponsors increase their assumed rates of return on plan assets when subject to pension-related costs. The evidence suggests an earnings-management interpretation. Finally, we examine whether pension fund managers are tactical in their asset allocations. We find that pension fund managers are active as an investor class, but do not seem to time the market in a manner consistent with return predictability.

Keywords: Asset Allocation, Managerial Assumptions, Pensions, Regulations

JEL Classification: G00, G11, G23, G28

Suggested Citation

Addoum, Jawad M. and van Binsbergen, Jules H. and Brandt, Michael W., Asset Allocation and Managerial Assumptions in Corporate Pension Plans (November 16, 2010). Available at SSRN: https://ssrn.com/abstract=1710902 or http://dx.doi.org/10.2139/ssrn.1710902

Jawad M. Addoum (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Jules H. Van Binsbergen

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/jules_vanbinsbergen

Michael W. Brandt

Duke University - Fuqua School of Business ( email )

1 Towerview Drive
Durham, NC 27708-0120
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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