How Does the Funding Status of Defined Benefit Pension Plans Affect Investment Decisions of Firms in the United States?

Journal of Business Finance and Accounting, Forthcoming

57 Pages Posted: 16 Mar 2015 Last revised: 1 Sep 2016

See all articles by Neeru Chaudhry

Neeru Chaudhry

affiliation not provided to SSRN

Hue Hwa Au Yong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Chris Veld

Monash University

Multiple version iconThere are 2 versions of this paper

Date Written: August 29, 2016

Abstract

We investigate whether the flexibility in making contributions towards defined benefit pension plans sponsored by firms in the United States allows managers to save cash and increase investments. Firms invest more at higher levels of pension deficit, defined as pension benefit obligations less pension assets, and scaled by total assets. At the median level (90th percentile) of pension deficit, investment increase by 6.7 cents (9.4 cents) for every dollar increase in cash. As the pension deficit increases, firms deviate more from the predicted level of investment. These findings suggest that the incremental investments are more likely to represent overinvestment by managers. Our results are robust to alternative model specifications and endogeneity concerns that may arise if investments are jointly determined with the funding policy of pension plans and the firm’s target cash level. We repeat our main analysis for the United Kingdom (UK) and also find for that country that, at a fixed cash level, total investment increases as pension deficit increases.

Keywords: Investment, capital expenditure, R&D, acquisition, defined benefit pension plan, pension deficit, underfunded pension plan

JEL Classification: G31, G32, G34, J33

Suggested Citation

Chaudhry, Neeru and Au Yong, Hue Hwa and Veld, Chris, How Does the Funding Status of Defined Benefit Pension Plans Affect Investment Decisions of Firms in the United States? (August 29, 2016). Journal of Business Finance and Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2578385 or http://dx.doi.org/10.2139/ssrn.2578385

Neeru Chaudhry (Contact Author)

affiliation not provided to SSRN

Hue Hwa Au Yong

Monash University - Department of Banking and Finance ( email )

PO Box 197
Caulfield East, Victoria 3145
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Chris Veld

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

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