Pension Risk and Corporate Investment Distortion
54 Pages Posted: 30 Jan 2018
Date Written: January 19, 2018
Failure to correct for pension risk leads to upward-biased discount rate estimates in firms with pension risk exposure. The result is a negative and economically significant relation between pension risk and corporate investment. The effect is confined to investment decisions that require discount rate estimates. Moreover, it is stronger if project value is more sensitive to such estimates. Because of this bias, firms miss valuable investment opportunities. The results survive robustness tests that address endogeneity concerns and alternative interpretations of the evidence. The general implication is that non-operating risks can distort corporate investment decisions.
Keywords: Pension Risk; Defined Benefit Pension Plan; Corporate Investment; Capital Budgeting; Cost of Capital
JEL Classification: G23; G31
Suggested Citation: Suggested Citation