Did Erisa's Prudent Man Rule Change the Pricing of Dividend Omitting Firms?
Posted: 14 Jun 1998 Last revised: 17 Feb 2019
Date Written: May 1, 1998
The Employee Retirement Income Security Act of 1974 (ERISA) subjected private pension fund managers to a strict "prudent man" rule. We show that dividend omitting firms underperform only after this law took effect, and that many institutional investors stop holding stocks that omit dividends in the post-ERISA sample period. If a firm reinitiates a dividend, then both effects reverse. Our results illustrate the role law may play in limiting arbitrage and segmenting markets. This may shed light on the failure of dividend omitting firms to behave like other value stocks in the post-ERISA sample period, a failure that provides a serious challenge to both behavioral and rational theories.
JEL Classification: G12, G18, G23
Suggested Citation: Suggested Citation