The Distorting Effect of the Prudent-Man Laws on Institutional Equity Investments

34 Pages Posted: 15 Sep 1999 Last revised: 13 Sep 2010

See all articles by Diane Del Guercio

Diane Del Guercio

University of Oregon, Lundquist College of Business; European Corporate Governance Institute (ECGI)

Date Written: 1996


I examine the effect of prudent man laws on the behavior of institutional investors. Variation in exposure to legal liability across types of investment managers allows me to disentangle the effect of the prudent man law from other potential influences on manager behavior. Bank managers significantly tilt the composition of their portfolios toward stocks that are viewed by the courts as prudent, while mutual fund managers do not. I provide evidence that this tilting toward prudent stocks by bank managers is robust over the 1968-1989 period, and is unlikely to be due to passive indexing or limits on allowed portfolio positions. Analysis of aggregate institutional ownership patterns reveals that tilting is also observable in aggregate data, and that this is primarily driven by bank manager tilting. I show that differences in bank and mutual fund managers' tendency to tilt toward prudent stocks may explain their portfolio performance differences over time.

JEL Classification: G20

Suggested Citation

Del Guercio, Diane, The Distorting Effect of the Prudent-Man Laws on Institutional Equity Investments (1996). Journal of Financial Economics, Vol. 40, No. 1, pp. 31-62, 1996, Available at SSRN:

Diane Del Guercio (Contact Author)

University of Oregon, Lundquist College of Business ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-5179 (Phone)
541-346-3341 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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