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Employees' Investment Decisions about Company Stock

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  • James J. Choi
  • David Laibson
  • Brigitte 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.

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Bibliographic Info

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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Publication status: published as Mitchell, Olivia S. and Stephen P. Utkus (eds.) Pension Design and Structure: New Lessons from Behavioral Finance. Oxford: Oxford University Press, 2004.
Handle: RePEc:nbr:nberwo:10228

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  1. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2002. "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance," JCPR Working Papers, Northwestern University/University of Chicago Joint Center for Poverty Research 257, Northwestern University/University of Chicago Joint Center for Poverty Research.
  2. Mark Grinblatt & Matti Keloharju, 2000. "What Makes Investors Trade?," Yale School of Management Working Papers, Yale School of Management ysm146, Yale School of Management, revised 01 Nov 2001.
  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, Elsevier, vol. 64(3), pages 397-421, June.
  4. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2002. "Defined Contribution Pensions: Plan Rules, Participant Choices, and the Path of Least Resistance," NBER Chapters, in: Tax Policy and the Economy, Volume 16, pages 67-114 National Bureau of Economic Research, Inc.
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