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Investment risk taking by institutional investors

According to theory, institutional investors face both risk-management and risk-shifting incentives. This article assesses the relevance of these conflicting incentives for Dutch pension funds and insurance firms over the period 1995 to 2009. Using a unique and extended data set, we observe a significant positive relationship between capital and asset risk for insurers, indicating that risk-management incentives dominate in the Dutch insurance industry. Risk-shifting incentives, however, also seem relevant, as stock insurers take more investment risk than their mutual peers. For Dutch pension funds, we conclude that overall neither risk-shifting nor risk-management incentives seem to dominate. Interestingly, we find that professional group pension funds take significantly less investment risk than other types of pension funds. This finding is in line with expectations, as in professional group pension funds potential incentive conflicts between pension fund participants and the employer are effectively internalized.