Hostname: page-component-76fb5796d-9pm4c Total loading time: 0 Render date: 2024-04-26T08:24:17.524Z Has data issue: false hasContentIssue false
  • English
  • Français

The Costs of Owning Employer Stocks: Lessons from Taiwan

Published online by Cambridge University Press:  06 April 2009

Yi-Tsung Lee ,
Yu-Jane Liu  and
Ning Zhu
Yi-Tsung Lee
Affiliation:
actyl@nccu.edu.tw, Department of Accounting, National Chengchi University, Taipei, Taiwan
Yu-Jane Liu
Affiliation:
yjliu@gsm.pku.edu.cn, Guanghua School of Management, Peking University, Beijing, China and Department of Finance, National Chengchi University, Taipei, Taiwan
Ning Zhu
Affiliation:
nzhu@ucdavis.edu, Department of Finance, University of California Davis, Davis, CA 95616 and Lehman Brothers.
Get access Rights & Permissions [Opens in a new window]

Abstract

Using data on all employees at listed companies in Taiwan, we find that the bias toward employer stocks is generic to individual investor decision making, but not limited to retirement plans. Seventy-one percent of the sample employees invest in employer stocks and employer stocks make up on average 47% of employee equity portfolios. The underdiversification resulting from the bias toward employer stocks is very costly. Holding current portfolio risk constant, employees forego 4.89% per annum in raw returns by investing in employer stocks, which represents 39.74% of their average 1998 salary income. Our findings have important implications for social security reform and retirement account management.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 43 , Issue 3 , September 2008 , pp. 717 - 740
Copyright
Copyright © School of Business Administration, University of Washington 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Agnew, J. “Do Behavioral Biases Vary across Individuals: Evidence from Individual Level 401(k) Data.” Journal of Financial and Quantitative Analysis, 41 (2006), 939–961.CrossRefGoogle Scholar
Agnew, J.; Balduzzi, P.; and Sunden, A.. “Portfolio Choice, Trading, and Returns in Large 401(k) Plans.” American Economic Review, 93 (2001), 193–215.CrossRefGoogle Scholar
Asian Development Bank. “Policy Options for Pension Reform in Asia: Challenges in Design and Implementation.” Technical Assistance Reports (1998).Google Scholar
Barber, B.; Lee, Y.-T.; Liu, Y.-J.; and Odean, T. “Just How Much Do Individual Investors Lose by Trading?” Review of Financial Studies, forthcoming (2008a).CrossRefGoogle Scholar
Barber, B.; Lee, Y.-T.; Liu, Y.-J.; and Odean, T.. “Do Individual Day Traders Make Money? Evidence from Taiwan.” Working Paper, University of California, Davis (2008b).Google Scholar
Barber, B., and Odean, T.. “Boys will be Boys: Gender, Overconfidence and Common Stock Investment.” Quarterly Journal of Economics, 116 (2001), 261–292.CrossRefGoogle Scholar
Barber, B.; Odean, T.; and Zhu, N.. “Do Retail Investors Move the Markets?” Review of Financial Studies, forthcoming (2008a).Google Scholar
Barber, B.; Odean, T.; and Zhu, N.. “Systematic Noise.” Journal of Financial Markets, forthcoming (2008b).Google Scholar
Benartzi, S. “Excessive Extrapolation and Allocations of 401(k) Accounts to Company Stocks.” Journal of Finance, 56 (2001), 1747–1764.CrossRefGoogle Scholar
Benartzi, S., and Thaler, R. H.. “How Much is Investor Autonomy Worth?” Journal of Finance, 57 (2002), 1593–1616.CrossRefGoogle Scholar
Benartzi, S., and Thaler, R. H.. “Save More Tomorrow: Using Behavioral Economics to Increase Employee Savings.” Journal of Political Economy, 112, Part 2 (2004), S164–S187.Google Scholar
Benartzi, S.; Thaler, R. H.; Utkus, S. P.; and Sunstein, C. R.. “Company Stock, Market Rationality, and Legal Reform.” Working Paper, University of Chicago Law School (2005).Google Scholar
Bethel, J. E.; Liebeskind, J. P.; and Opler, T.. “Block Share Purchases and Corporate Performance.” Journal of Finance, 53 (1998), 605–634.CrossRefGoogle Scholar
Brown, J.; Liang, N.; and Weisbenner, S.. “401(k) Matching Contributions in Company Stock—Costs and Benefits for Firms and Workers.” Journal of Public Economics, 90 (2006), 1315–1346.CrossRefGoogle Scholar
Campbell, J., and Feldstein, M.. Risk Aspects of Investment-based Social Security Reform. Chicago, IL: University of Chicago Press (2001).CrossRefGoogle Scholar
Chen, C.-H.; Lin, C.-J.; and Tsai, Y.-C.. “The Association between Employee Bonus and Subsequent Firm Performance: Evidence from Electronic Industry in Taiwan.” Working Paper, National Taiwan University (2005).Google Scholar
Choi, J.; Laibson, D.; Madrian, B.; and Metrick, A.. “Defined Contribution Pensions: Plan Rules, Participant Decisions and the Path of Least Resistance.” In Tax Policy and the Economy, Vol. 16, Poterba, J., ed. Cambridge, MA: MIT Press (2002).Google Scholar
Choi, J.; Laibson, D.; Madrian, B.; and Metrick, A.. “Employees' Investment Decisions about Company Stock.” In Pension Design and Decision-Making under Uncertainty, Mitchell, O. S. and Utkus, S. P., eds. Oxford, UK: Oxford University Press (2005).Google Scholar
Cogan, J., and Mitchell, O.. “Perspectives from the President's Commission on Social Security Reform.” Journal of Economic Perspective, 17 (2003), 149–172.CrossRefGoogle Scholar
Cohen, L. “Loyalty Based Portfolio Choice.” Working Paper, University of Chicago (2005).Google Scholar
DeGeorge, F.; Jenter, D.; Moel, A.; and Tufano, P.. “Selling Company Shares to Reluctant Employees: France Telecom's Experience.” Journal of Financial Economics, 71 (2004), 169–202.CrossRefGoogle Scholar
Dhar, R., and Zhu, N.. “Up Close and Personal: An Individual Level Analysis of the Disposition Effect.” Management Science, 52 (2006), 726–740.CrossRefGoogle Scholar
Feldstein, M.Privatizing Social Security. Chicago, IL: University of Chicago Press (1998).CrossRefGoogle Scholar
Feldstein, M., and Siebert, H.. Social Security Pension Reform in Europe. Chicago, IL: University of Chicago Press (2002).CrossRefGoogle Scholar
Goetzmann, W., and Kumar, A.. “Why Individual Investors Hold Under-Diversified Portfolios.” Working Paper, Yale University (2004).Google Scholar
Goetzmann, W.; Massa, M.; and Simonov, A.. “Portfolio Diversification and City Agglomeration.” Working Paper, Yale University (2004).CrossRefGoogle Scholar
Gordon, L. A., and Pound, J.. “ESOPs and Corporate Control.” Journal of Financial Economics, 27 (1990), 525–555.CrossRefGoogle Scholar
Guo, Y.-F. “A Summary of the Regulations on Tender Offers.” Securities and Futures Monthly, 23 (2005), 12–23.Google Scholar
Han, T.-S. “The Economic Effects of Profit Sharing and Taiwan-Style Employee Stock Ownership Plans: Evidence from Taiwan's High-Tech Firms.” Taiwan Management Journal, 3 (2003), 1–22.Google Scholar
Hardy, C. D.ABCs of Investing Your Retirement Funds, 2nd ed.Oradell, NJ: Medical Economic Books (1982).Google Scholar
Herbertsson, T. T., and Orszag, M. J.. “Issues in European Pension Reforms, Supplementary Pensions.” Working Paper, University of London (1999).Google Scholar
Holden, S., and VanDerhei, J.. “401(k) Plan Asset Allocation, Account Balances and Loan Activity.” Investment Company Institute Perspective, 10 (2004), 1–16.Google Scholar
Holden, S.; VanDerhei, J.; and Quick, C.. “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 1998.” Investment Company Institute Perspective, 6 (2000), 1–23.Google Scholar
Huberman, G. “Familiarity Breeds Investment.” Review of Financial Studies, 14 (2001), 659–680.CrossRefGoogle Scholar
Huberman, G.; Iyengar, S.; and Jiang, W.. “Defined Contribution Pension Plans: Determinants of Participation and Contribution Rates.” Journal of Financial Services Research, 31 (2007), 1–32.CrossRefGoogle Scholar
Huberman, G., and Jiang, W.. “Offering vs. Choice in 401(k) Plans, Equity Exposure and Number of Funds.” Journal of Finance, 61 (2006), 763–801.CrossRefGoogle Scholar
Huberman, G., and Sengmueller, P.. “Performance and Employer Stock in 401(k) Plans.” Review of Finance, 8 (2004), 403–443.CrossRefGoogle Scholar
Ivkovich, Z., and Weisbenner, S.. “Local Does as Local is: Information Content of the Geography of Individual Investors' Common Stock Investments.” Journal of Finance, 60 (2005), 267–306.CrossRefGoogle Scholar
Kahneman, D. “Maps of Bounded Rationality: Psychology for Behavioral Economics.” American Economic Review, 93 (2003), 1449–1475.CrossRefGoogle Scholar
Kahneman, D., and Tversky, A.. “Rational Choice and the Framing of Decisions.” Journal of Business, 59 (1986), 251–278.Google Scholar
Kehrer, D.The Pension Plan Investor. Chicago, IL: Probus Publishing Company (1991).Google Scholar
Khorana, A.; Servaes, H.; and Tufano, P.. “Explaining the Size of the Mutual Fund Industry around the World.” Journal of Financial Economics, 78 (2005), 145–185.CrossRefGoogle Scholar
Kruse, D.; Freeman, R.; Blasi, J.; Buchele, R.; and Scharf, A.. “Motivating Employer-Owners in ESOP Firm: Human Resource Policies and Company Performance.” Working Paper 10177, NBER (2005).Google Scholar
Leone, R. C., and Anrig, G., eds. Social Security Reform: Beyond the Basics. New York, NY: The Century Foundation (1999).Google Scholar
Lin, C.-W.The Developing Economies, XL–3 (2002), 327–358.Google Scholar
Lin, Q.-J. “The Past, Present, and Future of the Taiwan Mutual Fund Industry.” Wealth Management, 1 (2004).Google Scholar
Malmendier, U., and Tate, G.. “CEO Overconfidence and Corporate Investment.” Journal of Finance, 60 (2005), 2661–2700.CrossRefGoogle Scholar
Massa, M., and Simonov, A.. “Hedging, Familiarity, and Portfolio Choice.” Review of Financial Studies, 19 (2006), 633–685.CrossRefGoogle Scholar
Meulbroek, L. “Company Stock in Pension Plans: How Costly is It?” Working Paper 02-058, Harvard Business School (2003).Google Scholar
Mitchell, O. S., and Utkus, S. P.. “Company Stock and Retirement Plan Diversification.” Working Paper, University of Pennsylvania (2002).CrossRefGoogle Scholar
Muller, K.; Ryll, A.; and Wagener, H.-J.. Transformation of Social Security: Pensions in Central Eastern Europe. Germany: Physica-Verlag (1999).CrossRefGoogle Scholar
Qu, Q.-F. “On the Legality of Share Repurchase in the Event of Hostile Takeover.” TSEC Monthly Review, 498 (2003), 33–59.Google Scholar
Ramaswamy, K. “Company Stock and DC Plan Diversification.” Working Paper, University of Pennsylvania (2005).Google Scholar
Rauh, J. ”Own Company Stock in Defined Contribution Pension Plans: A Takeover Defense?” Journal of Financial Economics, 81 (2006), 379–410.CrossRefGoogle Scholar
Seasholes, M., and Zhu, N.. “Is There Information in the Local Portfolio Choices of Individuals?” Working Paper, University of California, Davis (2005).Google Scholar
Shu, P.-G.; Yeh, Y.-H.; and Yamada, T.. “The Behavior of Taiwan Mutual Fund Investors-Performance and Fund Flows.” Pacific-Basin Finance Journal, 10 (2002), 583–600.CrossRefGoogle Scholar
Zhu, N. “The Local Bias of Individual Investors.” Working Paper, University of California, Davis (2004).Google Scholar
Zhu, N. “Cost of Time and Household Choice between Direct and Delegated Investments.” Working Paper, University of California, Davis (2005).CrossRefGoogle Scholar