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Corporate Governance and Risk-Taking in Pension Plans: Evidence from Defined Benefit Asset Allocations

54 Pages Posted: 24 Feb 2012 Last revised: 17 Apr 2014

Hieu V. Phan

University of Massachusetts Lowell

Shantaram P. Hegde

University of Connecticut - School of Business

Date Written: January 23, 2012

Abstract

Based on theoretical advice and empirical evidence suggesting that risk-taking in asset allocation enhances pension returns, we evaluate empirically whether good corporate governance leads to a larger allocation of pension assets to risky securities as compared to safe investments. Our findings suggest that firms with good external and internal corporate governance take more risk by investing heavily in equities and allocating a smaller share of the plan assets to cash, government debt, and insurance company accounts. The main underlying mechanisms appear to be higher investment returns and better pension funding status associated with higher equity and lower safe asset allocations.

Keywords: Asset allocation, pension, corporate governance, risk-taking

JEL Classification: G3, G31, G34

Suggested Citation

Phan, Hieu V. and Hegde, Shantaram P., Corporate Governance and Risk-Taking in Pension Plans: Evidence from Defined Benefit Asset Allocations (January 23, 2012). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2009943

Hieu V. Phan (Contact Author)

University of Massachusetts Lowell ( email )

One University Avenue
Lowell, MA 01854
United States

Shantaram P. Hegde

University of Connecticut - School of Business ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-5135 (Phone)

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