Pension Funding Decisions, Interest Rate Assumptions and Share Prices

46 Pages Posted: 22 Jun 2004 Last revised: 30 Jan 2013

See all articles by Martin S. Feldstein

Martin S. Feldstein

National Bureau of Economic Research (NBER) (deceased); Harvard University (deceased)

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

Date Written: July 1982

Abstract

This paper explores how unfunded pension obligations affect the market values of firms. Finns appear to choose the interest rate they use in discounting future benefit obligations so as to balance the tax advantages of a low rate against the more healthy looking annual reports a high rate allows. Investors seem to penetrate this ruse and value firms as if obligations were figured at a standard rate. The rate thus used seems to be much lower than current long term interest rates. Pension liabilities are therefore overemphasized by the market. There is also some evidence that pension assets are undervalued. This suggests that growth of the private pension system might increase savings by investors and firms.

Suggested Citation

Feldstein, Martin S. and Morck, Randall K., Pension Funding Decisions, Interest Rate Assumptions and Share Prices (July 1982). NBER Working Paper No. w0938. Available at SSRN: https://ssrn.com/abstract=259413

Martin S. Feldstein (Contact Author)

National Bureau of Economic Research (NBER) (deceased)

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Randall K. Morck

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