Paper: "Corporate Pensions and Financial Distress"

NY times article:

"A paper by the academics Ying Duan, Edith S. Hotchkiss and Yawen Jiao, studied 729 troubled publicly traded companies over 20 years and found that the amounts of money that employees had in company stock remained relatively stable during periods of trouble, as did their new contributions. This is true even as the stock prices decline and the number of investors betting against the stock in the public markets through short sales increases."

From the paper abstract:

"We examine the role of corporate pension plans in determining how firms restructure in financial distress. Both defined benefit (DB) and defined contribution (DC) plans can have significant exposures to the company’s own stock, imposing significant losses on employees if the firm defaults and/or files for bankruptcy. We find that firms with DB plans typically have little exposure to the stock prior to default; the degree of underfunding increases significantly as firms near default, but is not related to restructuring types (bankruptcies versus out of court restructurings). In contrast, large exposures to company stock in DC plans often are not reduced prior to default. High levels of own-company stock ownership are positively related to default and bankruptcy probabilities. Our evidence suggests a link between employee-ownership related managerial entrenchment and default risk."

Very interesting. Their finding is (as we would expect) that the company employees are dumb money even when investing in the companies where they work. This is like all the people at Bear Stearns and Lehman that couldn't figure out their firms were going to fail.