Research

U.S. public pension funds are traditionally viewed as long-term investors with demand for safe, long-maturity bonds that match their liabilities. Using novel security-level bond holdings obtained through FOIA requests, I document a striking departure from this view: they maintain large duration mismatches and tilt toward short-term bonds, particularly in corporate bond portfolios. I show that this pattern arises from a regulatory friction. Funding ratios, the key solvency measure, are based on slow-moving discount rates disconnected from market interest rates. This weakens incentives to hedge interest rate risk and instead encourages reaching for yield, primarily through credit exposure. Exploiting a 2014 reform that required underfunded plans to lower discount rates, I show that tighter constraints causally increased allocations to short-term and high-yield bonds. Constrained funds reach for yield by selecting bonds with higher offering yields, yet earn lower risk-adjusted returns. A variance decomposition of funding ratios suggests that funding shortfalls are driven mainly by volatile returns and persistent initial underfunding, not duration mismatch. These findings underscore how regulation shapes portfolio choices and suggest aligning solvency rules with market-based valuations.

In this paper, we examine how legal uncertainty affects economic activity. We develop a model that distinguishes between three types of legal uncertainty, classifying them as either idiosyn- cratic or systematic. We test the model’s predictions using micro-level data on bankruptcy judges and corporate loans in Korea. To compute time-varying court-level measures of legal uncertainty, we exploit random case assignment to judges and exogenous judge rotations in the judicial system. Our results show that firms are more likely to file for restructuring in courts with lower levels of legal uncertainty. We also find that higher levels of legal uncertainty result in smaller credit markets, primarily for high-risk firms. Our analysis further indicates that credit supply is less responsive to idiosyncratic legal uncertainty than credit demand since banks can diversify idiosyncratic legal uncertainty across borrowers