In our paper, Corporate Governance and Risk-Taking in Pension Plans: Evidence from Defined Benefit Asset Allocations, forthcoming in the Journal of Financial and Quantitative Analysis, we examine whether good corporate governance leads to a larger allocation of pension assets to risky securities as compared to safe investments. Defined benefit (DB) plans are one of the most important private retirement schemes in corporate America. Although pension regulations require firms to establish separate trusts to manage and invest DB pension plan assets, these pension plans are owned by the sponsoring corporations and the plan asset allocations are made under the influence of, if not the direction and control of, the plan sponsors. Depending on the firm and plan characteristics as well as the market environment, firms may have different incentives in investing pension assets, namely, either risk-taking by allocating a larger share of plan assets to risky asset classes (e.g., equity) or risk management by investing heavily in safe asset classes (e.g., cash, government debt, and guaranteed insurance contracts).
Editor’s Note: The following post comes to us from Hieu Phan of the Department of Management at the University of Massachusetts Lowell and Shantaram Hegde, Professor of Finance at the University of Connecticut.