It is well documented that local bias exists in US state pension fund holdings, but now an article in the Journal of Financial Economics (forthcoming) finds evidence not only of local bias, but bias towards politically-connected stocks. Not only that, but the article finds that political bias is detrimental to fund performance.
“Political bias is positively related to the percentage of politically-affiliated trustees on the board and Congressional connections,” the authors say.
“The more politically affiliated trustees on the board, the more the fund shifts toward risky asset allocations. Overall, our results imply that political bias is likely costly to taxpayers and pension beneficiaries.”
It finds that state pension funds overweight local firms that make political contributions to local state politicians or have significant lobbying expenditures by 23 per cent and 17 per cent compared with the market portfolio.
“When estimated independently, our baseline results show that local bias in general has a positive albeit insignificant impact on fund performance, whereas local political bias has a pronounced negative effect on it.
“For instance, a one standard deviation increase in local political bias results in about a 0.25 per cent to 0.28 per cent decline in quarterly equity performance.
“We find that state funds having boards with a larger percentage of politically affiliated trustees invest more in politically connected local firms and those having boards with more financial experts invest less in such firms.”
To read the article below