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Did Reform of Prudent Trust Investment Laws Change Trust Portfolio Allocation?

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  • Max M. Schanzenbach
  • Robert H. Sitkoff

Abstract

This paper investigates the effect of changes in state prudent trust investment laws on asset allocation in noncommercial trusts. The old prudent-man rule favored “safe†investments and disfavored “speculation†in stock. The new prudent-investor rule directs trustees to craft an investment portfolio that fits the risk tolerance of the beneficiaries and the purpose of the trust. Using state- and institution-level panel data from 1986–97, we find that after adoption of the new prudent-investor rule, institutional trustees held about 1.5–4.5 percentage points more stock at the expense of “safe†investments. Our findings explain roughly 10–30 percent of the overall increase in stock holdings in the period studied. The rest of the increase appears to be attributable to stock market appreciation. We conclude that, even though trust fiduciary laws are nominally default rules, institutional trustees are nonetheless sensitive to changes in those rules.

Suggested Citation

  • Max M. Schanzenbach & Robert H. Sitkoff, 2007. "Did Reform of Prudent Trust Investment Laws Change Trust Portfolio Allocation?," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 681-711.
  • Handle: RePEc:ucp:jlawec:v:50:y:2007:p:681-711
    DOI: 10.1086/519815
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    References listed on IDEAS

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    3. Amihud, Yakov & Li, Kefei, 2006. "The Declining Information Content of Dividend Announcements and the Effects of Institutional Holdings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(03), pages 637-660, September.
    4. Del Guercio, Diane, 1996. "The distorting effect of the prudent-man laws on institutional equity investments," Journal of Financial Economics, Elsevier, vol. 40(1), pages 31-62, January.
    5. Susan McLaughlin, 1995. "The impact of interstate banking and branching reform: evidence from the states," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 1(May).
    6. Papke, Leslie E & Wooldridge, Jeffrey M, 1996. "Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 619-632, Nov.-Dec..
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    Cited by:

    1. Massa, Massimo & Zhang, Lei, 2013. "Monetary policy and regional availability of debt financing," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 439-458.

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