Abstract: This article reports the results of an empirical study of the effect of the new
prudent investor rule on asset allocation by institutional trustees. Using federal banking
data spanning 1986 through 1997, the authors find that, after adoption of the new prudent
investor rule, institutional trustees held about 1.5 to 4.5 percentage points more stock at
the expense of “safe” investments. This shift to stock amounts to a 3 to 10 percent
increase in stock holdings and accounts for roughly 10 to 30 percent of the over-all
increase in stock holdings in the period under study. The authors conclude that the
adoption of the new prudent investor rule had a significant effect on trust asset allocation.