BY JAMES SAFT
State public pension funds love buying shares in local companies, but it is not so much a matter of “buying what you know” as “buying shares of companies with political clout.”
A new study of equity holdings of self-managed state public pension funds finds that they have not only a bias towards in-state companies, but in particular towards those with political connections and influence.
What’s more, these investments aren’t winners; this bias towards in-state politically connected firms costs the typical state pension fund about $225 million in annual decline in fund performance, according to estimates in the study, which is slated to be published in an upcoming Journal of Financial Economics.
“We find that state pension funds overweight these politically active firms and doing so is detrimental to fund equity performance,” write authors Daniel Bradley and Xiaojing Yuan of the University of South Florida and Christos Pantzalis of the University of Massachusetts at Lowell.
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