The In-State Equity Bias of State Pension Plans
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.
This research was supported by the U.S. Social Security Administration (SSA) through grant #10-M-98363-1-01 to the National Bureau of Economic Research (NBER) as part of the SSA Retirement Research Consortium. The findings and conclusions expressed are solely those of the authors and do not represent the views of SSA, any agency of the Federal Government, or the NBER. We are grateful to seminar and conference participants at the Australasian Finance and Banking Conference, China International Conference in Finance, European Finance Association Conference, Finance Down Under Conference, Luxembourg Asset Management Summit, MSU Federal Credit Union Conference on Financial Institutions and Investments, University of Illinois, University of Oregon, University of Toronto, and Western Finance Association Meetings, and Frank de Jong, Zoran Ivković, Denis Sosyura, Juan Sotes-Paladino, and Jay Wang for useful comments and suggestions. We also thank Ed Bender and the Institute on Money in State Politics for access to data on state campaign contributions, Clark Bensen of Polidata for access to historical state election data, Diego Garcia and Oyvind Norli for their data on state name counts in firm 10-k filings, and the University of Illinois Campus Research Board for additional financial support. An earlier version of this paper was entitled “The Investment Behavior of State Pension Plans.” Disclosure: Brown is a Trustee for TIAA and has also received compensation as a speaker, author, or consultant from a number of financial institutions that are involved in retirement plan design. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Jeffrey R. Brown
I have served since 2009 as a Trustee for TIAA, a company that provides retirement products to many public retirement plans. I have received compensation totaling more than $10,000 from several financial institutions, the American Council of Life Insurers and NISA Investment Advisors for speaking, writing or consulting about retirement income.