Working Paper: NBER ID: w10228
Authors: James J. Choi; David Laibson; Brigitte C. Madrian; Andrew Metrick
Abstract: We study the relationship between past returns on a company's stock and the level of investment in that stock by the participants in that company's 401(k) plan. Using data on 94,191 plan participants, we analyze several different decision points: the initial fraction of savings allocated to company stock, the changes in this fraction, and the reallocations of portfolio holdings across different asset classes. Like Benartzi (2001), we find that high past returns on company stock induce participants to allocate more of their contributions to company stock. We also find, however, that high returns on company stock have the opposite effect on reallocations of portfolio holdings, with high returns leading to shifts away from company stock and into other forms of equity. Overall, for company stock decisions, participants in our sample appear to be momentum investors when making contribution decisions and contrarian investors when making trading decisions.
Keywords: No keywords provided
JEL Codes: E2; G1; G2; H3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high past returns on company stock (G12) | increased contributions to that stock (G34) |
| high past returns on company stock (G12) | decreased reallocations out of company stock (G34) |
| common market-wide returns (G19) | increased allocations to company stock (G34) |
| company-specific returns (G12) | increased allocations to company stock (G34) |