Corporate Post-Retirement Benefit Plans and Real Investment

Abstract

This paper shows that the real investment by non-financial firms is systematically related to the size of their defined-benefit plan. In particular, these plans allow R&D-intensive firms to retain and borrow from their employees, which is attractive since they have high adjustment costs, require a stable cash flow, have less collateral, assets that are harder to value, and high asymmetric information and agency costs. In contrast, capital expenditures benefit from credit multiplier effects with regards to regular debt, which substitutes for post-retirement obligations. As a result, firms with defined benefit plans have 12% more R&D and 5% less CapEx compared to otherwise similar firms, and they vary contributions as a function of cash flow and real investment. The role of post-retirement plans is attenuated in countries with available alternative funding sources. The results are robust to controlling for other dimensions of financial policy, such as cash holdings, debt maturity, dividends, preferred stock, convertible debt, and leverage, that also affect real investment.

Keywords: Real investment, capital expenditure, R&D, financial policy, financial flexibility

JEL Classification: G3, F4, F3