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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

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Date posted: September 20, 2006  

Suggested Citation

Rauh, Joshua D., Risk Shifting Versus Risk Management: Investment Policy in Corporate Pension Plans (June 24, 2007). Available at SSRN: https://ssrn.com/abstract=931237 or http://dx.doi.org/10.2139/ssrn.931237

Contact Information

Joshua D. Rauh (Contact Author)
Stanford Graduate School of Business ( email )
655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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