Working Paper: NBER ID: w21020
Authors: Jeffrey R. Brown; Joshua M. Pollet; Scott J. Weisbenner
Abstract: This paper provides evidence on the investment behavior of 27 state pension plans that manage their own equity portfolios. Even though these state plans typically hold broadly diversified portfolios, they substantially over-weight the equity of companies that are headquartered in-state. The over-weighting of within-state stocks by these plans is three times larger than that of other institutional investors. We explore three possible reasons for this in-state bias: familiarity bias, information-based investing, and political considerations. While there is a substantial preference for in-state stocks, there is no similar tilt toward holding stocks from neighboring states or out-of-state stocks in the state’s primary industry. States generate excess returns through their in-state investment activities, particularly among smaller stocks in the state’s primary industry. We also find that state pension plans are more likely to hold a within-state stock if the headquarters of the firm is located in a county that gave a high fraction of its campaign contributions to the current governor. These politically-motivated holdings yield excess returns for the pension fund.
Keywords: state pension plans; instate bias; investment behavior; political considerations
JEL Codes: G11; G23; H75
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| state pension plans exhibit a significant instate bias (H55) | instate stocks represent 97% of their portfolios (G23) |
| instate stocks represent 97% of their portfolios (G23) | compared to a 56% weighting expected if they mirrored the overall market (G19) |
| familiarity bias (G41) | pension managers prefer to invest in known entities within their state (G23) |
| pension managers prefer to invest in known entities within their state (G23) | increased portfolio risk (G11) |
| state pension plans achieve excess returns from instate investments (H55) | particularly in small stocks within the state's primary industry (L70) |
| likelihood of holding instate stocks increases with campaign contributions to the current governor (H79) | indicating a political influence on investment decisions (D72) |
| political connections influence investment decisions (G11) | particularly for stocks in the largest industry of the state (L79) |