Risk Shifting Versus Risk Management: Investment Policy in Corporate Pension Plans

61 Pages Posted: 20 Sep 2006

See all articles by Joshua D. Rauh

Joshua D. Rauh

Stanford Graduate School of Business; Hoover Institution; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: June 24, 2007

Abstract

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.

Keywords: Risk Shifting, Risk Management, Pensions, Asset Allocation

JEL Classification: G31, G32, G23, G39

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

Joshua D. Rauh (Contact Author)

Stanford Graduate School of Business ( email )

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Stanford, CA 94305-5015
United States

Hoover Institution ( email )

Stanford, CA 94305-6010
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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