The Prudent Investor Rule and Trust Asset Allocation: An Empirical Analysis

This article reports the results of an empirical study of the effect of the new prudent investor rule on asset allocation by institutional trustees. Using federal banking data spanning 1986 through 1997, the authors find that, after adoption of the new prudent investor rule, institutional trustees held about 1.5 to 4.5 percentage points more stock at the expense of "safe" investments. This shift to stock amounts to a 3 to 10 percent increase in stock holdings and accounts for roughly 10 to 30 percent of the over-all increase in stock holdings in the period under study. The authors conclude that the adoption of the new prudent investor rule had a significant effect on trust asset allocation.

Keywords: prudent man rule, prudent investor rule, trust investment law, modern portfolio theory, agency costs, fiduciary, ERISA

JEL Classification: C23, G11, G21, G23, K11

Suggested Citation: Suggested Citation

Sitkoff, Robert H. and Schanzenbach, Max Matthew, The Prudent Investor Rule and Trust Asset Allocation: An Empirical Analysis (May 1, 2010). ACTEC Journal, Vol. 35, p. 314, 2010, Harvard Law and Economics Discussion Paper No. 668, Available at SSRN: https://ssrn.com/abstract=1640140 or http://dx.doi.org/10.2139/ssrn.1640140