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Corporate Governance and Risk Taking in Pension Plans: Evidence from Defined Benefit Asset Allocations

Published online by Cambridge University Press:  03 May 2013

Hieu V. Phan  and
Shantaram P. Hegde
Hieu V. Phan
Affiliation:
[email protected], Manning School of Business, University of Massachusetts Lowell, 1 University Ave, Lowell, MA 01854
Shantaram P. Hegde
Affiliation:
[email protected], School of Business, University of Connecticut, 2100 Hillside Rd, Storrs, CT 06269
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Abstract

Based on theoretical advice and empirical evidence suggesting that risk taking in asset allocation enhances pension returns, we evaluate empirically whether good corporate governance leads to a larger allocation of pension assets to risky securities as compared to safe investments. Our findings suggest that firms with good external and internal corporate governance take more risk by investing heavily in equities and allocating a smaller share of the plan assets to cash, government debt, and insurance company accounts. The main underlying mechanisms appear to be higher investment returns and better pension funding status associated with higher equity and lower safe asset allocations.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 3 , June 2013 , pp. 919 - 946
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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