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

  • Joshua Rauh
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    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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    File URL: http://www.nber.org/papers/w13240.pdf
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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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    Publication status: published as Joshua D. Rauh, 2009. "Risk Shifting versus Risk Management: Investment Policy in Corporate Pension Plans," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 22(7), pages 2487-2533, July.
    Handle: RePEc:nbr:nberwo:13240
    Note: CF PE
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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