The Effect of Regulations on Pension Risk Shifting: Evidence from the US and Europe

Guan, Yifu; Lui, Daphne

doi:10.1111/jbfa.12199

Cited by 25 publications

(13 citation statements)

References 66 publications

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“…While distressed firms decrease risk-taking in investments, firms with underfunded plans increase risk-taking; further, increased risk-taking occurs when firms are both distressed and underfunded. Guan and Lui (2016) also found similar results. Using data from the UK, Cocco and Volpin (2007) found that sponsors with underfunded plans and many insider trustees, that is, those trustees who are also executive directors of the sponsor, tend to increase risk-taking.…”

Section: Literature Reviewsupporting

confidence: 68%

“…Although the premium increases in line with the level of underfunding of the pension fund, it is largely flat with respect to risk-taking. Guan and Lui (2016) found that risk-shifting is mitigated in the UK, where pension insurance premiums depend on risk-taking, as well as in the Netherlands, where full pension funding is mandatory. Love et al (2011) showed that risk-shifting is the optimal investment strategy when the pension insurance premium is not pre-adjusted to the fair price in terms of risk-taking.…”

Section: Literature Reviewmentioning

confidence: 99%

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Optimal risk-taking in corporate defined benefit plans under risk-shifting

Kitamura

Omori

2019

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Purpose The purpose of this paper is to theoretically examine the risk-taking decision of corporate defined benefits (DB) plans. The equity holders’ investment problem that is represented by the position of a vulnerable option is solved. Design/methodology/approach The simple traditional contingent claim approach is applied, which considers only the distributions of corporate cash flow, without the model expansions, such as market imperfections, needed to explain the firms’ behavior for DB plans in previous studies. Findings The authors find that the optimal solution to the equity holders’ DB investment problem is not an extreme corner solution such as 100 percent investment in equity funds as in the literature. Rather, the solution lies in the middle range, as is commonly observed in real-world economies. Originality/value The major value of this study is that it develops a clear mechanism for obtaining an internal solution for the equity holders’ DB investment problem and it provides the understanding that the base for corporate investment behavior for DB plans should incorporate the fact that in some cases the optimal solution is in the middle range. Therefore, the corporate risk-taking behavior of DB plans is harder to identify than the results of the empirical literature have predicted.

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Section: Literature Reviewsupporting

confidence: 68%

Section: Literature Reviewmentioning

confidence: 99%

Optimal risk-taking in corporate defined benefit plans under risk-shifting

Kitamura

Omori

2019

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“…Pension assumptions affect the estimated value of pension liabilities and thus contribution requirements. Furthermore, managers have considerable control over the allocation of pension plan assets (Guan and Lui, ). Managers have better information about how pension liabilities are likely to evolve in the future.…”

Section: Background Related Literature and Hypothesis Developmentmentioning

confidence: 99%

“…For example, Kabir et al. () study the effect of the pension component of executive compensation on the cost of debt, and Goh and Li () examine whether the pay‐performance sensitivity increases as the pension component of the executive component increases.…”

mentioning

confidence: 99%

How does the Funding Status of Defined Benefit Pension Plans Affect Investment Decisions of Firms in the United States?

Chaudhry

Yong

Veld

2016

Business Fin & Account

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We investigate whether the flexibility in making contributions towards defined benefit pension plans sponsored by firms in the United States allows managers to save cash and increase investments. Firms invest more at higher levels of pension deficit, defined as pension benefit obligations less pension assets, and scaled by total assets. At the median level (90 th percentile) of pension deficit, investments increase by 6.7 cents (9.4 cents) for every dollar increase in cash. As the pension deficit increases, firms deviate more from the predicted level of investment. These findings suggest that the incremental investments are more likely to represent overinvestment by managers. Our results are robust to alternative model specifications and endogeneity concerns that may arise if investments are jointly determined with the funding policy of pension plans and the firm's target cash level. We repeat our main analysis for the United Kingdom and also find for that country that, at a fixed cash level, total investment increases as pension deficit increases.

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“…However, research has highlighted the flexibility management has in the contribution decision, suggesting these mechanisms may not be binding (Chaudhry et al., ). Therefore, our analyses add to the literature that speaks to the effectiveness of these mechanisms put in place by regulators and the PBGC (Guan & Lui, ).…”

Section: Introductionmentioning

confidence: 96%

Executive compensation and cash contributions to defined benefit pension plans

Cheng

Swenson

2018

Business Fin & Account

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Cash contributions to defined benefit pension (DB) plans reduce cash flows from operations without directly affecting the current year's net income. We utilize this unique setting to investigate how managerial incentives to report higher cash flows from operations, executive compensation in particular, affect contributions. Using a comprehensive dataset of DB plan contributions, we find that firms with higher chief executive officer (CEO) compensation contribute less to DB plans, consistent with managers benefiting from lower pension contributions. Results are stronger when CEO compensation is directly linked to cash flows from operations or when CEO compensation is more sensitive to cash flows from operations. We also find enhanced disclosure and more transparent reporting under the recent pension accounting regime mitigates the negative association between executive compensation and cash contributions.

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The Effect of Regulations on Pension Risk Shifting: Evidence from the US and Europe

Cited by 25 publications

References 66 publications

Optimal risk-taking in corporate defined benefit plans under risk-shifting

Optimal risk-taking in corporate defined benefit plans under risk-shifting

How does the Funding Status of Defined Benefit Pension Plans Affect Investment Decisions of Firms in the United States?

Executive compensation and cash contributions to defined benefit pension plans

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