Market Conditions, Firm Investments, and Strategic Use of Pension Discount Rates

56 Pages Posted: 9 Jul 2020 Last revised: 27 Apr 2022

See all articles by Liping Chu

Liping Chu

Shanghai University of International Business and Economics

Michael A. Goldstein

Babson College - Finance Division

Xin Li

Michigan Technological University - College of Business

Tong Yu

University of Cincinnati - Department of Finance - Real Estate

Date Written: June 15, 2020

Abstract

We find firms strategically reduce their pension contributions through the choices of pension discount rates asymmetrically: firms slowly lower rates when interest rates drop, but quickly raise rates when rates rise. Cross-sectionally, distressed firms set pension discount rates higher than healthy firms, yet corporations setting high discount rates are better funded and more profitable. Non-distressed companies have a strong positive relationship between investment productivity and pension discount rates, but this is weaker among distressed firms. Overall, the imperfect elasticity of pension discount rates to interest rates offers corporations leeway to alleviate the constraints from pension liabilities.

Keywords: Pension discount rate; Low interest rate; Pension liabilities; Earnings management

JEL Classification: G11, G22

Suggested Citation

Chu, Liping and Goldstein, Michael A. and Li, Xin and Yu, Tong, Market Conditions, Firm Investments, and Strategic Use of Pension Discount Rates (June 15, 2020). Available at SSRN: https://ssrn.com/abstract=3627965 or http://dx.doi.org/10.2139/ssrn.3627965

Liping Chu

Shanghai University of International Business and Economics ( email )

Michael A. Goldstein

Babson College - Finance Division ( email )

320 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4402 (Phone)
781-239-5004 (Fax)

HOME PAGE: http://faculty.babson.edu/goldstein/

Xin Li (Contact Author)

Michigan Technological University - College of Business ( email )

1400 Townsend Dr
Academic Office Building
Houghton, MI 49931
United States

Tong Yu

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
4019548606 (Phone)
4019548606 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
100
Abstract Views
702
rank
358,968
PlumX Metrics