Growth Opportunities, Stockholders' Claim/Liability on Pension Plans, and Corporate Pension Policies

Abstract

In this study, I derive the value of stockholders' claim on a pension surplus and stockholders' liability for a pension deficit in the post-Employee Retirement Income Security Act regulatory environment. Based on that valuation, I develop a model of corporate pension policies in which sponsoring firms weigh contributions to their pension plan against the exercise of growth options in the allocation of limited financial resources. The model shows how corporate pension funding and asset allocation policies are shaped by the sponsoring firms' characteristics, such as growth options, the marginal corporate tax rate, and regulatory variables such as the deficit reduction contribution rate, the variable-rate insurance premium, and the maximum possible fraction of operating assets that can be seized by the Pension Benefit Guaranty Corporation. I discuss policy and empirical implications of the theoretical results.