Employees as Creditors: The Disciplinary Role of Pension Deficits in the Market for Corporate Control

Abstract

This paper examines the disciplinary role of corporate pension deficits in the market for corporate control. We find that companies with larger pension deficits are less likely to engage in diversifying mergers, experience higher merger announcement returns, pay lower premiums to targets, and use a higher percentage of cash in their payment. These results are more evident for acquirers with pension plans that are dominated by actively working employees or collectively bargained by employees. Our findings indicate that corporate pension deficits provide employees with strong incentives to monitor managerial performance and influence managers to make value-enhancing investment decisions.

Keywords: Pension deficits, Market for corporate control, Mergers and acquisitions, Merger announcement returns, Disciplinary role

JEL Classification: G32, G34