Corporate Pensions and Returns to Innovation
Posted: 12 Feb 2020
Date Written: January 11, 2020
We examine the stock returns implications of the corporate defined benefit pension plans in R&D portfolio specifications. Pensions are one of the most significant off-balance-sheet items and liabilities arising from pensions are extensive. In our sample, firms with pension plans are 38% more levered when we integrate pension liabilities and assets into the firms’ capital structure. Using a cross-section of US stock returns, we find that R&D-intensive firms that increase pension size subsequently underperform the benchmark returns. In six R&D-market capitalization portfolios, evidence suggests that pension size potentially drives statistically significant negative stock returns-pension liabilities relations for low market capitalization and high R&D-intensity firms. The negative benchmark adjusted returns remain significant only for the high R&D-intensive firms over a long horizon. Our findings support the hypothesis that investors under-react the firms' decisions to increase pension (off-balance-sheet) liabilities. This study provides a new evidence and quantifies the impact of information risks in stock returns arising from off-balance-sheet items.
Keywords: Cross section of stock returns, R&D, Corporate pensions
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