Investment Risk Taking by Institutional Investors

According to theory, institutional investors face both risk management and risk shifting incentives. This paper assesses the relevance of these conflicting incentives for Dutch pension funds and insurance firms over the period 1995-2009. Using a unique and extended dataset, we observe a significant positive relationship between capital and asset risk for insurers, indicating that risk management incentives dominate in the Dutch insurance industry. Risk shifting incentives, however, also seem relevant, as stock insurers take more investment risk than their mutual peers. For Dutch pension funds we conclude that, on average, neither risk shifting nor risk management incentives are dominant. Interestingly, we find that professional group pension funds take significantly less investment risk than other types of pension funds. This finding is in line with expectations, as in professional group pension funds potential incentive conflicts between pension fund participants and the employer are effectively internalized