Abstract (EN)

This paper provides new evidence that familiarity bias affects the portfolios of institutional investors. Using a sample of large US defined-benefit pension plans for the period 1992 to 2002, we show that the corporate focus of the sponsoring firm has an impact on the investment policy of the pension plan. Pension plans sponsored by firms with a high proportion of foreign sales are more likely to invest in international assets, plans sponsored by firms that are active in research and development are more likely to invest in private equity, and plans with sponsors that have more fixed assets are more likely to invest in real estate and mortgages. Comparing to existing explanations of why plans tilt their portfolios towards the sponsor’s focus, familiarity bias is the most compelling one. The worse performance of pension plans with such portfolio allocation bias is consistent with pension managers being over-confident about familiar assets.