Keywords
company stock concentration, diversification risk, retirement losses
Abstract
Recent high-profile cases have illustrated the dangers of employee investment in company stock. These debacles are unlikely to be the last ones, or even the most severe. Companies with more than 50 percent of retirement assets in company stock are common, and fractions over 80 percent continue to prevail at such large companies as Procter & Gamble, Anheuser- Busch, and Pfizer.1
The concentration of retirement wealth in company stock is a clear violation of diversification principles. Recently, several studies have quantified the economic costs of this concentration. Muelbroek (2002) uses a Sharperatio approach and finds that the average diversification cost of company stock is about 42 percent of its value. Ramaswamy (2003) uses option-pricing techniques to compute the cost of insuring the extra risk of company stock. For a range of plausible parameter values, he finds that this insurance would be prohibitively expensive.2
Original Publication Citation
“Employees’ Investment Decisions about Company Stock.” 2004. In Olivia S. Mitchell and Stephen P. Utkus, editors., Pension Design and Structure, New York: Oxford University Press, pp. 121-36 (with James J. Choi, David Laibson and Andrew Metrick). https://pensionresearchcouncil.wharton.upenn.edu/wp-content/uploads/2015/09/0-19-927339-1-07.pdf
BYU ScholarsArchive Citation
Choi, James J.; Laibson, David; Madrian, Brigitte C.; and Metrick, Andrew, "Employee Investment Decisions about Company Stock" (2004). Faculty Publications. 9071.
https://scholarsarchive.byu.edu/facpub/9071
Document Type
Book Chapter
Publication Date
2004
Publisher
Oxford University Press
Language
English
College
Marriott School of Business
Department
Finance
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