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http://ssrn.com/abstract=968627
 
 

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Funding and Asset Allocation in Corporate Pension Plans: an Empirical Investigation


Zvi Bodie


Boston University - Department of Finance & Economics

Randall Morck


University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER)

Robert A. Taggart, Jr.


Northwestern University

Jay Light


Harvard Business School - Finance Unit

July 1986

NBER Working Paper No. w1315

Abstract:     
This paper contrasts and empirically tests two different views of corporate pension policy: the traditional view that pension funds are managed without regard to either corporate financial policy or the interests of the corporation and its shareholders, and the corporate financial perspective represented by the recent theoretical work of Black (1980), Sharpe (1916),Tepper (1981), and Treynor (1971), which stresses the potential effects of a firm's financial condition on its pension funding and asset allocation decisions. We find several pieces of evidence supporting the corporate financial perspective. First, we find that there is a significant inverse relationship between firms' profitability and the discount rates they choose tor eport their pension liabilities. In view of this we adjust all reported pension liabilities to a common discount rate assumption. We then find a significant positive relationship between firm profitability and the degree ofpension funding, as is consistent with the corporate financial perspective. We also find some evidence that firms facing higher risk and lower tax liabilities are less inclined to fully fund their pension plans. On the asset allocation question, we find that the distribution of plan assets invested in bonds is bi-modal, but that it does not tend to cluster around extreme portfolio configurations to the extent predicted by the corporate financial perspective. We also find that the percentage of plan assets invested in bonds in negatively related to both total size of plan and the proportion of unfunded liabilities.The latter relationship shows up particularly among the riskiest firms and is consistent with the corporate financial perspective on pension decisions.

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Date posted: March 6, 2007  

Suggested Citation

Bodie, Zvi and Morck, Randall and Jr., Robert A. Taggart, and Light, Jay, Funding and Asset Allocation in Corporate Pension Plans: an Empirical Investigation (July 1986). NBER Working Paper No. w1315. Available at SSRN: http://ssrn.com/abstract=968627

Contact Information

Zvi Bodie (Contact Author)
Boston University - Department of Finance & Economics ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-4160 (Phone)
617-353 6667 (Fax)
HOME PAGE: http://smgnet.bu.edu/mgmt/profiles/BodieZvi.html
Randall K. Morck
University of Alberta - Department of Finance and Statistical Analysis ( email )
2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-5683 (Phone)
780-492-3325 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Robert A. Taggart, Jr.
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
United States
Jay O. Light
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
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