Research
Research
Working Papers
[Job Market Paper]
Abstract: I show that US public pensions strategically invest in private equity to exploit the appearance of stability created by smoothed net asset value reporting. Using the 2012 GASB 67 and 68 accounting reform as a quasi-exogenous shock to the visibility of pension underfunding, I find that underfunded pensions increased their allocation to private equity and were 19% more likely to select fund managers with a history of stronger return smoothing within four years of the reform. While smoothing offers short-term accounting benefits, it amplifies portfolio allocation risks during market downturns through the "Denominator Effect". When public asset values decline, the relative weight of smoothed PE holdings becomes mechanically inflated, causing overallocation for plans that must maintain portfolio weights within specified bands. This imbalance often forces pensions to liquidate PE holdings in the secondary market at substantial discounts, locking in losses during periods of stress.
with Arthur Korteweg and Stavros Panageas
(Revise and Resubmit at Journal of Financial Economics)
Abstract: We evaluate private equity (PE) performance using investor-specific stochastic discount factors, and examine whether public pension plans could benefit from changing their allocation to PE. Plans invest in PE funds with higher than average risk-adjusted performance. This is mainly due to access to successful managers, not superior selection skill. Decomposing returns into risk-compensation and "alpha'', we find that some plans obtain higher PE returns by taking more risk without earning higher, and in some cases earning lower, risk-adjusted returns, broadly consistent with agency problems within plans.
Published Papers
(Critical Finance Review, 2022)
(Journal of Monetary Economics, 2023)