Corporate pension funds’ search for yield with private equity investment: Its determinants and consequences

Abstract

This study examines corporate pension funds’ search for yield through investments in private equity (PE). Using pension asset allocation data from 10-K filings, we find that corporate pension funds significantly increase the PE share within their risky assets following underperformance relative to their expected return. This risk-taking behavior is more pronounced for sponsoring firms that were more financially constrained with poorly funded plans in the previous year. Furthermore, we discover that pension asset allocation to PE does not significantly increase pension returns but does lower pension return volatility and tracking error relative to the expected return.