Does Familiarity Breed Alternative Investment? Evidence from Corporate Defined Benefit Pension Plans

Abstract

Defined benefit pension plans backed by firms with high R&D expenditures and high land and buildings (L&B) holdings exhibit high private equity and real estate investment, respectively. Within these asset classes, plans with R&D (L&B) intensive sponsoring firms overweigh venture capital (opportunistic real estate). Pension funds with each of these alternative investment tilts underperform other plans by up to 200 basis points. We find evidence supporting the barrier to entry and the risk management hypotheses, but no evidence consistent with the informational advantage, risk shifting, and hedging hypotheses. We conduct several tests that appear to validate a familiarity bias. This familiarity bias in asset allocation to alternative assets reduces corporate DB pension fund resources by about $1.4 billion a year.

Keywords: pension plans, sponsor, R&D, L&B, alternative assets, private equity, real estate, tilt, information, spillover, familiarity

JEL Classification: G11, G23, G31, G32