Working Paper: NBER ID: w13240
Authors: Joshua Rauh
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: pension plans; risk management; corporate finance
JEL Codes: G23; G31; G32; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Funding Status (I22) | Asset Allocation (G11) |
| Poorly Funded Plans (H69) | Allocation to Safer Securities (G23) |
| Well-Funded Plans (G23) | Allocation to Equity (D63) |
| Funding Status Improves (G32) | Allocation to Equities Increases (G11) |
| Funding Status Deteriorates (G32) | Allocation to Safer Assets (G11) |
| Credit Ratings (G24) | Investment Strategies (G11) |
| Probability of Bankruptcy Increases (G33) | Allocation to Equity Declines (G32) |