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

Joshua Rauh

No 13240, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G23 G31 G32 H32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-rmg
Date: 2007-07
Note: CF PE
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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.

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