Alon Brav
Duke University, Durham, NC
J.B. Heaton
University of Chicago, Chicago, IL
ABSTRACT
The Employee Retirement Income Security Act of 1974 (ERISA) subjected private pension fund managers to a strict "prudent man" rule. We show that dividend omitting firms and underperform only after this law took effect, and that many institutional investors stop holding stocks that omit dividends in the post-ERISA sample period. If a firm reinitiates a dividend, then both effects reverse. Our results illustrate the rile law may play in limiting arbitrage and segmenting markets. This may shed light on the failure of dividend omitting firms to behave like other value stocks in the post-ERISA sample period, a failure that provides a serious challenge to both behavioral and rational theories.