Familiarity Breeds Alternative Investment: Evidence from Corporate Defined Benefit Pension Plans

We show that corporate sponsor R&D-intensity and land and buildings (L&B)-intensity increase defined-benefit pension plan investment in private equity and real estate and mortgages, respectively. The likelihood of investment in these two alternative asset classes is higher for large plans, well-funded plans, and plans with a low share of active plan participants. This is inconsistent with risk shifting, hedging or diversification motives. The performance of pension plans with portfolio tilts lags significantly the performance of the average plan in our sample, while there is no evidence that sponsor firms benefit from tilts in their pension portfolios. Hence, an informational advantage, specific expertise, or spillovers between pension funds and sponsor firms cannot explain portfolio tilts. Consistent with theories of familiarity based on ambiguity aversion, investment in PE and RE by funds with R&D-intensive and L&B-intensive sponsors increases significantly with the correlation of thes