Seminar: Steen Thomsen, Centre for Corporate Governance, Copenhagen Business School

Title: Portfolio Allocation and Firm Value. A Case Study of 3 Danish Pension Funds.

Abstract:

We study the investments of 3 large Danish Pension funds in the Danish stock market 1980-2003. The 3 funds are found to use flexible indexing strategies: they index to a significant extent, but not perfectly so (correlation coefficients of 0.7-0.9 with market weights). We also find some evidence of herding since their investments appear to be influenced by what the other funds do. All 3 investors tend to rebalance their portfolios, i.e. to reduce deviations from market weights over time. Since passive index strategies mechanically trail the market we hypothesize a tendency to buy or sell after the event and find this to be the case. Moreover we find that firm value tends to drop following investment which appears to be a result of mean reversion. We conclude that index tracking strategies should probably be supplemented with value considerations to maximize expected returns.