Showing papers by "Wei Jiang published in 2006"

Offering versus Choice in 401(k) Plans: Equity Exposure and Number of Funds

Abstract: Records of over half a million participants in more than 600 401(k) plans indicate that participants tend to allocate their contributions evenly across the funds they use, with the tendency weakening with the number of funds used. The number of funds used, typically between three and four, is not sensitive to the number of funds offered by the plans, which ranges from 4 to 59. A participant’s propensity to allocate contributions to equity funds is not very sensitive to the fraction of equity funds among offered funds. The paper also comments on limitations on inferences from experiments and aggregate-level data analysis. HOW MUCH AND HOW TO SAVE FOR RETIREMENT is one of the most important financial decisions made by most people. Defined contribution (DC) pension plans, such as the popular 401(k) plans, are important instruments of such savings. By 2001 year-end, about 45 million American employees held 401(k) plan accounts with a total of $1.75 trillion in assets (Holden and VanDerhei (2001)). An important characteristic of these plans is that the participant has responsibility over his savings among a plan’s various funds. How responsibly do the participants behave? In particular, how sensitive are participants’ choices to possible framing effects associated with the menu of choices they are offered? To explore these questions, this paper analyzes a data set recently provided by the Vanguard Group consisting of records of more than half a million participants in about 640 DC plans. These plans offer between 4 and 59 funds in which participants can invest. All plans offer at least one stock fund, 635 plans

Analysts’ Weighting of Private and Public Information

Abstract: Using both a linear regression method and a probability-based method, we find that on average, analysts place larger than efficient weights on (i.e., they overweight) their private information when they forecast corporate earnings. We also find that analysts overweight more when issuing forecasts more favorable than the consensus, and overweight less, and may even underweight, private information when issuing forecasts less favorable than the consensus. Further, the deviation from efficient weighting increases when the benefits from doing so are high or when the costs of doing so are low. These results suggest that analysts' incentives play a larger role in misweighting than their behavioral biases. Copyright 2006, Oxford University Press.

Directors' Ownership in the U.S. Mutual Fund Industry

Abstract: The paper provides an empirical investigation of directors' ownership in the mutual fund industry. Our results show that, contrary to anecdotal evidence, a significant portion of directors hold shares in the funds they oversee. Moreover, ownership patterns are broadly consistent with the optimal-contracting hypothesis. That is, ownership is positively and significantly correlated with most variables that are predicted to indicate greater value from monitoring or indicate lack of other governance mechanisms. We find some evidence that directors exhibit performance chasing in their ownership choice.

Offering vs. Choice by 401(k) Plan Participants: Equity Exposure and Number of Funds 1

Abstract: Records of more than half a million participants in more than six hundred 401(k) pension plans indicate that participants tend to use a small number of funds: The number of participants using a given number of funds peaks at three funds and declines after more than three funds. Participants tend to allocate their contributions evenly across the funds they use, with the tendency weakening with the number of funds used. The median number of funds used is between three and four, and is not sensitive to the number of funds offered by the plans, which ranges from 4 to 59. A participant’s propensity to allocate contributions to equity funds is hardly sensitive to the fraction of equity funds among those offered by his plan. The paper also comments on limitations on inference available from experiments and from aggregate-level data analysis.

Pairwise-slopes statistics for testing curvature ∗

Abstract: This paper considers the problem of testing curvature (e.g., linearity, concavity, convexity) in a nonparametric regression model. We first introduce descriptive measures of curvature based on pairwise slopes in the data. These pairwise-slopes statistics (and their asymptotic standard errors) do not require bandwidth choice, making them easy to compute. Tests of curvature (e.g., linearity, concavity, convexity) based on these statistics are analogous to the test of independence based on the rank correlation statistic (“tau”) of Kendall (1938). Since these (global) tests are not consistent against general alternatives, we propose consistent versions of the curvature tests using a discretized process of localized versions of the pairwise-slopes statistics. Although these tests require bandwidth choice, they are easy to implement and are robust to non-normal and heteroskedastic disturbances. Monte Carlo simulations investigate the small-sample properties of the pairwise-slopes statistics and the associated tests. An empirical application to earnings equations is considered. Modified versions of the pairwise-slopes statistics are developed for other models of interest, including a semilinear regression model and a nonparametric fixed-effects model.

How more choices are demotivating: impact of more options on 401(k) investment *

Abstract: Prior psychological studies documented the choice overload phenomenon (i.e., more choice leads to decreased probability that individuals choose to choose) in experiments using small consumer products. This paper examines whether such phenomenon exists in a non-experimental setting of defined-contribution retirement savings. Using records of 401(k) participation and contribution allocation for nearly 800,000 eligible employees from Vanguard, we find that for every ten funds added to the choice menu, (i) the average employee’s participation probability is lowered by about 2%; (ii) the contribution allocation to safe funds (money market and bond funds) is 5.4 percentage points higher; (iii) the contribution allocation to stock funds is 7-9 percentage points lower. Such evidence supports predictions of the choice overload hypothesis that more choices can de-motivate choosing and that under such conditions individuals may resort to simplifying decision-making heuristics.

Career Concerns And The Optimal Pay-for-Performance Sensitivity

Abstract: Prior literature suggests that managers’ career concerns provide implicit incentive mechanisms for their behaviors (Fama (1980), Holmstrom (1999)), and may substitute the explicit incentives in their compensation contracts (Gibbons and Murphy (1992)). We show that the substitution effect can be weakened, and even reversed, when managers perform multiple tasks and are concerned about both the level and variability of their reputation. We also find that after taking into consideration managers’ concerns for the variability of their reputation, the optimal pay-for-performance sensitivity can also be increasing in the underlying risk measure. We test these predictions using a large sample of chief executive officers’ compensations over 1993-2003; results are consistent with our model predictions. (JEL: J31; J41; D80) ∗The Fuqua School of Business, Duke University, Durham, NC 27708, email: qc2@duke.edu; Columbia Business School, New York, NY 10027, email: wj2006@columbia.edu. We received helpful comments from Jim Anton, Robert Bushman, Harry Evans, Jennifer Francis, Itay Goldstein, Thomas Hemmer, Steve Kaplan, Young Kwon, Tracy Lewis, Mike Riordan, and workshop participants at University of California — Berkeley and HKUST. We are responsible for all remaining errors. The research was supported by the Fuqua School of Business, Duke University and the Eugene Lang Center of Entrepreneurialship, Columbia Business School.