sealPurdue News

September 1996

Pension funds waste energy on sub-par firms, study says

NOTE TO JOURNALISTS: Copies of the study are available from Purdue News Service, (765) 494-2077.

WEST LAFAYETTE, Ind. -- Instead of trying to improve the performance of a lagging firm, pension funds might get more bang for your buck if they dumped the slacker from their portfolio and invested in another company.

Unfortunately, says Sunil Wahal, assistant professor of finance in Purdue University's Krannert Graduate School of Management, pension funds are reluctant to make such major adjustments in their portfolio.

"In the '80s we witnessed a 'takeover' phenomenon that was generally viewed as a good thing because it supposedly weeded out bad managers," he says. "Later in the decade, these buyouts became less trendy and pension funds became active investors."

Pension funds make suggestions to shareholders, such as replacing key officers, adding more independent directors or restructuring the firm. Wahal says none of this appears to have much impact on the firm's performance, and in many cases, it might be better to invest in another firm altogether.

In a seven-year study that appears in the Journal of Financial and Quantitative Analysis, Wahal looked at the performance of firms held by nine of the most active pension funds in the country. Fund assets range from $13 billion to $125 billion. Wahal discovered that despite a pension fund's most intensive efforts, there was no significant effect on a company's performance.

"In fact, many times the troubled firm may perform worse after making suggested changes," he says. "In most instances there is no appreciable increase in stock price, and operating performance doesn't improve."

What it boils down to, Wahal says, is that pension fund activism is no substitute for an active takeover market. "You or I wouldn't hold on to stock that was performing poorly, especially if we could invest in a company that was doing better," he says. "But that's what these funds are doing, and they're doing it with our money."

CONTACT: Wahal, (765) 494-4488; e-mail,

Purdue News Service: (765) 494-2096; e-mail,

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