Financing Constraints and the Cost of Capital: Evidence from the Funding of Corporate Pension Plans
57 Pages Posted: 21 Sep 2009 Last revised: 22 Aug 2011
There are 2 versions of this paper
Financing Constraints and the Cost of Capital: Evidence from the Funding of Corporate Pension Plans
Financing Constraints and the Cost of Capital: Evidence from the Funding of Corporate Pension Plans
Date Written: August 21, 2011
Abstract
We investigate the relation between firms' weighted average cost of capital and internal financial resources, using mandatory pension contributions as a proxy for internal financial resources. Rauh (2006) documents a negative association between mandatory pension contributions and capital expenditures. We find that an increase in mandatory pension contributions increases the cost of capital, but only for firms facing greater external financing constraints. Our results suggest that firms’ cost of capital is an intervening variable that can explain Rauh’s finding that mandatory pension contributions (i.e. internal financing constraints) result in foregone investment. We also find that, consistent with their view that mandatory pension contributions are a credit neutral event, Moody’s does not incorporate mandatory pension contributions into their credit ratings. Our evidence suggests this view is appropriate for firms that are not financially constrained but is inappropriate for firms that are more financially constrained. Overall, we provide evidence consistent with recent studies (Rauh 2006; Almeida and Campello 2007) that conclude that financial market frictions affect real economic activity, and in particular, corporate investment.
Keywords: financing constraints, investment, cost of capital, defined benefit pension plans
JEL Classification: G23, G30, G31, G32
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Determinants and Implications of Corporate Cash Holdings
By Tim C. Opler, Lee Pinkowitz, ...
-
The Cash Flow Sensitivity of Cash
By Heitor Almeida, Murillo Campello, ...
-
Why Do U.S. Firms Hold so Much More Cash than They Used to?
By Thomas W. Bates, Kathleen M. Kahle, ...
-
Why Do U.S. Firms Hold so Much More Cash than They Used to?
By Thomas W. Bates, Kathleen M. Kahle, ...
-
Bank Lines of Credit in Corporate Finance: An Empirical Analysis
By Amir Sufi
-
Corporate Governance and Firm Cash Holdings
By Jarrad Harford, Sattar Mansi, ...
-
Corporate Financial Policy and the Value of Cash
By Michael W. Faulkender and Rong Wang
-
Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies
By Heitor Almeida, Viral V. Acharya, ...