Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans
Joshua D. Rauh
Stanford Graduate School of Business; National Bureau of Economic Research (NBER)
AFA 2005 Philadelphia Meetings
I exploit sharply nonlinear funding rules for defined benefit pension plans in order to identify the dependence of corporate investment on internal financial resources in a large sample. Capital expenditures decline with mandatory contributions to defined benefit pension plans, even when controlling for correlations between the pension funding status itself and the firm's unobserved investment opportunities. The effect is particularly evident among firms that face financing constraints based on observable variables such as credit ratings. Investment also displays strong negative correlations with the part of mandatory contributions resulting solely from unexpected asset market movements.
Number of Pages in PDF File: 56
Date posted: December 30, 2004
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