NBER WORKING PAPER SERIES EMPLOYEES’ INVESTMENT DECISIONS.pdf

NBER WORKING PAPER SERIES EMPLOYEES’ INVESTMENT DECISIONS ABOUT COMPANY STOCK James J. Choi David Laibson Brigitte C. Madrian Andrew Metrick Working Paper 10228 /papers/w10228 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 January 2004 The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research. ©2003 by James J. Choi, David Laibson, Brigitte C. Madrian, and Andrew Metrick. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Employees’ Investment Decisions about Company Stock James J. Choi, David Laibson, Brigitte C. Madrian, and Andrew Metrick NBER Working Paper No. 10228 January 2004 JEL No. E2, G1, G2, H3 ABSTRACT We study the relationship between past returns on a companys stock and the level of investment in that stock by the participants in that companys 401(k) plan. Using data on 94,191 plan participants, we analyze several different decision points: the initial fraction of savings allocated to company stock, the changes in this fraction, and the reallocations of portfolio holdings across different asset classes. Like Benartzi (2001), we find that high past returns on company stock induce participants to allocate more of their contributions to company stock. We also find, however, that high returns on company stock have t