Funding & Asset Allocation in Corporate Pension Plans: An Empirical Investigation

National Bureau of Economic Research Conference Vol. University of Chicago Press, 1986

University of Alberta School of Business Research Paper No. 2013-638

Posted: 8 Jun 2013

See all articles by Zvi Bodie

Zvi Bodie

Boston University - Department of Finance & Economics

Jay Light

Harvard Business School - Finance Unit

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Robert A. Taggart

Boston College - Carroll School of Management; National Bureau of Economic Research (NBER)

Date Written: July 7, 1985

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.

Suggested Citation

Bodie, Zvi and Light, Jay O. and Morck, Randall K. and Taggart, Robert A., Funding & Asset Allocation in Corporate Pension Plans: An Empirical Investigation (July 7, 1985). National Bureau of Economic Research Conference Vol. University of Chicago Press, 1986; University of Alberta School of Business Research Paper No. 2013-638. Available at SSRN: https://ssrn.com/abstract=2276223

Zvi Bodie (Contact Author)

Boston University - Department of Finance & Economics ( email )

United States

HOME PAGE: http://www.zvibodie.com

Jay O. Light

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

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)

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European Corporate Governence Institute ( email )

c/o ECARES ULB CP 114
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Belgium

Asian Bureau of Finance and Economic Research ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Robert A. Taggart

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Dept. of Finance
Chestnut Hill, MA 02467
United States
617-552-4113 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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