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Risk Shifting versus Risk Management: Investment Policy in Corporate Pension Plans

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Author Info
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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13240.

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Date of creation: Jul 2007
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Handle: RePEc:nbr:nberwo:13240

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Find related papers by JEL classification:
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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