Corporate Pensions and Financial Distress

39 Pages Posted: 3 Dec 2019

See all articles by Ying Duan

Ying Duan

Simon Fraser University (SFU) - Beedie School of Business

Pouyan Foroughi

York University

Edith S. Hotchkiss

Boston College - Carroll School of Management

Yawen Jiao

University of California, Riverside

Multiple version iconThere are 2 versions of this paper

Date Written: November 17, 2019

Abstract

We examine the role of corporate pension plans in determining how firms restructure in financial distress. Both defined benefit (DB) and defined contribution (DC) plans can have significant exposures to the company’s own stock, imposing significant losses on employees if the firm defaults and/or files for bankruptcy. We find that firms with DB plans typically have little exposure to the stock prior to default; the degree of underfunding increases significantly as firms near default, but is not related to restructuring types (bankruptcies versus out of court restructurings). In contrast, large exposures to company stock in DC plans often are not reduced prior to default. High levels of own-company stock ownership are positively related to default and bankruptcy probabilities. Our evidence suggests a link between employee-ownership related managerial entrenchment and default risk.

Keywords: Financial distress; Pension plans; Company stock; Underfunding

JEL Classification: G33, G34, G38

Suggested Citation

Duan, Ying and Foroughi, Pouyan and Hotchkiss, Edith S. and Jiao, Yawen, Corporate Pensions and Financial Distress (November 17, 2019). Available at SSRN: https://ssrn.com/abstract=3488819 or http://dx.doi.org/10.2139/ssrn.3488819

Ying Duan

Simon Fraser University (SFU) - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

Pouyan Foroughi

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Edith S. Hotchkiss (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)

Yawen Jiao

University of California, Riverside ( email )

Riverside, CA 92521
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
22
Abstract Views
177
PlumX Metrics