Tracking stock

Abstract: About a third of the assets in large retirement savings plans are invested in company stock, and about a quarter of the discretionary contributions are invested in company stock. From a diversification perspective, this is a dubious strategy. This paper explores the role of excessive extrapolation in employees’ company stock holdings. I find that employees of firms that experienced the worst stock performance over the last 10 years allocate 10.37 percent of their discretionary contributions to company stock, whereas employees whose firms experienced the best stock performance allocate 39.70 percent. Allocations to company stock, however, do not predict future performance. ROUGHLY A THIRD OF THE ASSETS in large retirement savings plans are invested in company stock ~i.e., stocks issued by the employing firm! .I n extreme cases, such as Coca-Cola, the allocation to company stock reaches 90 percent of the plan assets. From a diversification perspective, it is even more puzzling that Coca-Cola employees allocate 76 percent of their own discretionary contributions to Coca-Cola shares. This strategy seems dubious, and it is in complete contrast to Markowitz ~1952! and Sharpe ~1964!, who predict that people will hold well-diversified portfolios. This paper examines whether excessive extrapolation of past returns could explain at least part of the discretionary allocations to company stock. 1 The empirical analysis utilizes a unique database of SEC filings that describes the variation in investment elections across companies for 1993. There are at least two reasons why the allocation to company stock is an interesting topic to study. First, the costs of insufficient diversification can be substantial. For example, with the assumption of a constant relative risk aversion of two, Brennan and Torous ~1999! find that the certainty equivalent of investing one dollar in a single stock over a 10-year period is only 36 cents! In the case of company stock, the costs of insufficient diversification

Abstract: This paper characterizes the function relating the number of new shares issued by a firm to the resulting change in the firm's stock price, when insiders are asymmetrically informed. We show that, in equilibrium, the stock price will be a decreasing function of the issue size; moreover, the rate of decrease can be so rapid to cause "equity rationing." We also show that there will be underinvestment relative to the symmetric information case. RECENT EMPIRICAL WORK HAS shown that the announcement of a stock issue is associated with a drop in the corresponding share price1, and Myers and Majluf [9] have explained why one would expect this result under asymmetric information. If management is acting in the interests of the current shareholders, it will be reluctant to issue new stock when it knows the value of the firm's existing assets is high. A stock issue, therefore, signals to the market that the firm's current assets are overvalued and drives down the share price. In this paper, we generalize the Myers-Majluf model by eliminating the assumption that the firm has a single all-or-nothing investment opportunity whose cash requirements are fixed and known by all investors, and by allowing the firm to choose not merely whether to issue stock, but also how much stock to issue2. This generalization allows us to analyze questions about the relationship between the stock price and the issue size, which do not arise in the Myers-Majluf model. Our principal results are, first, that the stock price following the announcement