Pension Risk and Corporate Investment Distortion

54 Pages Posted: 30 Jan 2018

See all articles by Demian Berchtold

Demian Berchtold

Ecole hôtelière de Lausanne

Oliver Dichter

University of Bern

Claudio F. Loderer

University of Berne - Institute for Financial Management; European Corporate Governance Institute (ECGI)

Urs Waelchli

Rochester-Bern Executive Programs; University of Rochester - Simon Business School

Date Written: January 19, 2018

Abstract

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

Berchtold, Demian Simon and Dichter, Oliver and Loderer, Claudio F. and Waelchli, Urs, Pension Risk and Corporate Investment Distortion (January 19, 2018). Available at SSRN: https://ssrn.com/abstract=3106581 or http://dx.doi.org/10.2139/ssrn.3106581

Demian Simon Berchtold

Ecole hôtelière de Lausanne ( email )

Route de Cojonnex 18
Lausanne, 1000
Switzerland

Oliver Dichter (Contact Author)

University of Bern ( email )

Gesellschaftsstrasse 49
Bern, BERN 3001
Switzerland

Claudio F. Loderer

University of Berne - Institute for Financial Management ( email )

Engehaldenstrasse 4
Bern, CH-3012
Switzerland
+41 31 631 37 75 (Phone)
+41 31 631 84 21 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Urs Waelchli

Rochester-Bern Executive Programs ( email )

Engehaldenstrasse 4
Bern, 3012
Switzerland

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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