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RFS Advance Access originally published online on March 10, 2008
Review of Financial Studies 2009 22(3):1213-1245; doi:10.1093/rfs/hhn012
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© The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Loyalty-Based Portfolio Choice

Lauren Cohen
Harvard Business School

Address correspondence to Lauren Cohen, Harvard Business School, Soldiers Field, Boston, MA 02163; Tel: 1-617-495-3888; Fax: 1-617-496-8443; e-mail: lcohen{at}hbs.edu.

JEL Classification: D31, J26, J32


  Abstract

I evaluate the effect of loyalty on individuals' portfolio choice using a unique dataset of retirement contributions. I exploit the statutory difference that, in 401(k) plans, stand-alone employees can invest directly in their division, while conglomerate employees must invest in the entire firm, including all unrelated divisions. Consistent with loyalty, employees of stand-alone firms invest 10 percentage points (75%) more in company stock than conglomerate employees. Support is also found using variation in loyalty between different groups of employees, across and within firms. The cost to employees of loyalty is large, amounting to nearly a 20% loss in retirement income.

I would like to thank George Akerlof, Nick Barberis, Shlomo Benartzi, Effi Benmelech, Marianne Bertrand, John Cochrane, Karl Diether, Eugene Fama, John Heaton, Wendy Heltzer, Brigitte Madrian, Chris Malloy, Lior Menzly, Andrew Metrick, Toby Moskowitz, Terry Odean, Lubos Pastor, Monika Piazzesi, Josh Rauh, Ruy Ribeiro, Tano Santos, Breno Schmidt, Paul Sengmuller, Richard Thaler, and an anonymous referee for their helpful discussions and comments. I am also grateful to seminar participants at Arizona State, University of California–Berkeley, Boston College, Chicago, Columbia, Cornell, Duke, Emory, Harvard Business School, Indiana, MIT, North Carolina, Notre Dame, Stanford, Texas, Wharton, Yale, the SIFR Conference on Portfolio Choice and Investor Behavior, and the EFA 2004 Maastricht meeting for useful comments. I thank Mark Minichiello and Spin-off Advisors, LLC, for providing me with spin-off and carve-out data.


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