The Pension Research Council
Book Title

Pension Design and Structure: New Lessons from Behavioral Finance

Chapter Seven: Employee Investment Decisions About Company Stock
James J. Choi, David Laibson, Brigitte Madrian, and Andrew Metrick
0-19-927339-1-07

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Abstract — We study the relationship between past returns on a company’s stock and the level of investment in that stock by participants in that firm’s 401(k) plan. Several different decision points are of interest: the initial fraction of savings allocated to company stock, the changes in this fraction, and the reallocations of portfolio holdings across different asset classes. We find that high past returns on company stock do induce participants to allocate more of their new contributions to company stock. By contrast, high company stock have the opposite effect on reallocations of portfolio holdings: high returns produce portfolio shifts away from company stock and into other forms of equity. Overall, for company stock decisions, participants in our sample appear to be momentum investors when making contribution decisions, but they are contrarian investors when making trading decisions.