The In-State Equity Bias of State Pension Plans / Jeffrey R. Brown, Joshua M. Pollet, Scott J. Weisbenner.

Format:

Book

Author/Creator:

Brown, Jeffrey R.

Contributor:

National Bureau of Economic Research.

Pollet, Joshua M.

Weisbenner, Scott J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w21020.

NBER working paper series no. w21020

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2015.

Summary:

This paper provides evidence on the investment behavior of 27 state pension plans that manage their own equity portfolios. Even though these state plans typically hold broadly diversified portfolios, they substantially over-weight the equity of companies that are headquartered in-state. The over-weighting of within-state stocks by these plans is three times larger than that of other institutional investors. We explore three possible reasons for this in-state bias: familiarity bias, information-based investing, and political considerations. While there is a substantial preference for in-state stocks, there is no similar tilt toward holding stocks from neighboring states or out-of-state stocks in the state's primary industry. States generate excess returns through their in-state investment activities, particularly among smaller stocks in the state's primary industry. We also find that state pension plans are more likely to hold a within-state stock if the headquarters of the firm is located in a county that gave a high fraction of its campaign contributions to the current governor. These politically-motivated holdings yield excess returns for the pension fund.

Notes:

Print version record

March 2015.