Did ERISA's Prudent Man Rule Change the Pricing of Dividend Omitting Firms?

27 Pages Posted: 14 Jun 1998  

Alon Brav

Duke University - Fuqua School of Business

J.B. Heaton

Bartlit Beck Herman Palenchar & Scott LLP

Date Written: May 1998

Abstract

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

Brav, Alon and Heaton, J.B., Did ERISA's Prudent Man Rule Change the Pricing of Dividend Omitting Firms? (May 1998). Available at SSRN: https://ssrn.com/abstract=98568 or http://dx.doi.org/10.2139/ssrn.98568

Alon Brav

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-2908 (Phone)
919-684-2818 (Fax)

J.B. Heaton (Contact Author)

Bartlit Beck Herman Palenchar & Scott LLP ( email )

Courthouse Place
54 West Hubbard Street
Chicago, IL 60610
United States
312-494-4425 (Phone)
312-494-4440 (Fax)

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