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

62 Pages Posted: 9 Jul 2007 Last revised: 7 Mar 2021

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: July 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.

Suggested Citation

Rauh, Joshua D., Risk Shifting Versus Risk Management: Investment Policy in Corporate Pension Plans (July 2007). Available at SSRN: https://ssrn.com/abstract=999035

Joshua D. Rauh (Contact Author)

Stanford Graduate School of Business ( email )

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Hoover Institution ( email )

Stanford, CA 94305-6010
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National Bureau of Economic Research (NBER)

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