Title: | INSIDE INFORMATION AND THE OWN COMPANY STOCK PUZZLE |
Authors: | Nieuwerburgh, Stijn Van |
Issue Date: | 20-Sep-2005 |
Series/Report no.: | SC-AM-05-07 |
Abstract: | U.S. investors allocate 30-40% of their financial asset portfolio in the stock of the company stock they work for. Such a portfolio flies in the face of standard portfolio theory, which prescribes that an investor should hold less of a financial asset that is positively correlated with her undiversified labor income. Nevertheless, we propose a rational explanation that prescribes a long position in own company stock. Precisely because the own company stock is positively correlated with the investor's labor income, any information the investor learns about her earnings is a partial information advantage in her own company stock. When confronted with a choice of what information to acquire, employees may choose to learn about their own firm. Learning lowers the employee's risk of holding own-firm equity, which raises its risk-adjusted returns and makes a long position optimal. |
URI: | http://hdl.handle.net/2451/26637 |
Appears in Collections: | Asset Management |
Files in This Item:
File | Description | Size | Format | |
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S-AM-05-07.pdf | 246.12 kB | Adobe PDF | View/Open |
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