Pension Risk and Equity Returns

40 Pages Posted: 11 Jan 2016 Last revised: 26 Oct 2016

Date Written: September 21, 2016


We develop an analytical framework that divides the contribution of pension risk to the total systematic risk of the firm into two parts: (1) the risk due to the investment strategy of the pension plan (“Mismatch Risk”); and (2) the risk due to the funded status of the pension plan (“Deficit Risk”). We then use this framework to show that the financial statement treatment of pension plan obligations has implications for how pension risk is impounded into equity returns. Our empirical strategy uses variation in the financial statement effect of two new accounting standards as natural experiments to generate inferences. In contrast with the empirical finding in Jin, Merton and Bodie (2006), we find that pension risk is only reflected in equity returns when the underlying drivers of risk are disclosed and recognized on the firm’s financial statements.

Keywords: Pension risk, off-balance sheet finance, pension accounting, market efficiency

JEL Classification: G24, G31, G34, D43

Suggested Citation

Chapman, Craig J. and Naughton, James P., Pension Risk and Equity Returns (September 21, 2016). Available at SSRN: or

Craig J. Chapman

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Jacobs Center 6227
Evanston, IL 60208
United States
8474912662 (Phone)
8474671202 (Fax)


James P. Naughton (Contact Author)

University of Virginia, Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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