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Employees' Investment Decisions about Company Stock

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Author Info
James J. Choi
David Laibson
Brigitte Madrian
Andrew Metrick

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10228.

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Date of creation: Jan 2004
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Handle: RePEc:nbr:nberwo:10228

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Find related papers by JEL classification:
E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
G1 - Financial Economics - - General Financial Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Mark Grinblatt, 2001. "What Makes Investors Trade?," Journal of Finance, American Finance Association, vol. 56(2), pages 589-616, 04. [Downloadable!] (restricted)
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  2. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance," NBER Working Papers 8655, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Choi, James J. & Laibson, David & Metrick, Andrew, 2002. "How does the Internet affect trading? Evidence from investor behavior in 401(k) plans," Journal of Financial Economics, Elsevier, vol. 64(3), pages 397-421, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. James Choi & David Laibson & Brigitte Madrain & Andrew Metrick, 2007. "Reinforcement Learning in Investment Behavior," Levine's Bibliography 122247000000001737, UCLA Department of Economics. [Downloadable!]
  2. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2004. "Saving or Retirement on the Path of Least Resistance," Levine's Bibliography 122247000000000606, UCLA Department of Economics. [Downloadable!]
  3. James J. Choi & David Laibson & Brigitte C. Madrian, 2007. "The Flypaper Effect in Individual Investor Asset Allocation," NBER Working Papers 13656, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2006. "The Importance of Default Options for Retirement Savings Outcomes: Evidence from the United States," NBER Working Papers 12009, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2004. "Consumption-Wealth Comovement of the Wrong Sign," NBER Working Papers 10454, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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