Managing Pension Risks: A Corporate Finance Perspective

11 Pages Posted: 23 Dec 2013

See all articles by Gabriel Kimyagarov

Gabriel Kimyagarov

Citigroup, Inc. - Citigroup Global Markets

Anil Shivdasani

University of North Carolina Kenan-Flagler Business School

Date Written: Fall 2013

Abstract

Defined benefit (DB) pension plans of both U.S. and European companies are significantly underfunded because of the low interest rate environment and prior decisions to invest heavily in equities. Additional contributions and the recovery of stock markets since the end of the crisis have helped a bit but pension underfunding remains significant. Pension underfunding has substantial corporate finance implications. The authors show that companies with large pension deficits have historically delivered weaker share price performance than their peers and also trade at lower valuation multiples. Large deficits also reduce financial flexibility, increase financial risk, particularly in downside economic scenarios, and contribute to greater stock price volatility and a higher cost of capital. The authors argue that the optimal approach to managing DB pension risks relates to the risk tolerance of specific companies and their short and long‐term strategic and financial priorities. Financial executives should consider the follow pension strategies:

Suggested Citation

Kimyagarov, Gabriel and Shivdasani, Anil, Managing Pension Risks: A Corporate Finance Perspective (Fall 2013). Journal of Applied Corporate Finance, Vol. 25, Issue 4, pp. 41-49, 2013, Available at SSRN: https://ssrn.com/abstract=2371490 or http://dx.doi.org/10.1111/jacf.12041

Gabriel Kimyagarov (Contact Author)

Citigroup, Inc. - Citigroup Global Markets

399 Park Avenue
6th Floor
New York, NY 10043
United States

Anil Shivdasani

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3182 (Phone)
919-962-2068 (Fax)

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