The Investment Behavior of State Pension Plans

Jeffrey Brown, Joshua Pollet, Scott Weisbenner

NBER Retirement Research Center Paper No. NB 09-12
Issued in September 2009

This paper provides evidence on the investment behavior of 20 state pension plans that actively manage their own equity portfolios. We find that while these states tend to hold a diversified portfolio that approximates the overall market, they nonetheless substantially overweight the holdings of stocks of companies that are headquartered in-state. The extent of this over-weighting of within-state stocks by state pension plans is three times larger than that of other institutional investors. We explore three possible reasons for this in-state bias, including familiarity bias, information-based investing, and non-financial/political considerations. State boundaries are important for predicting state pension plan holdings – while there is a significant preference for instate stocks, there is no similar tilt toward holding stocks from neighboring stocks. We find evidence that states are able to generate excess returns through their in-state investment activities, particularly among smaller stocks in the primary industry in the state. However, we also find evidence that is at least suggestive of political influence playing a role in the stock selection process, as state pension plans of corrupt states are more likely to hold within state stocks. The difference in performance between within-state and out-of-state stock investments is strongest for the state pension plans located in more corrupt states.

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