Do Corporates Set Pension Discount Rates Strategically?

48 Pages Posted: 9 Jul 2020 Last revised: 22 Feb 2021

See all articles by liping chu

liping chu

affiliation not provided to SSRN

Michael A. Goldstein

Babson College - Finance Division

Xin Li

University of Cincinnati - Department of Finance - Real Estate

Tong Yu

University of Cincinnati - Department of Finance - Real Estate

Date Written: June 15, 2020

Abstract

We document that the majority of U.S. firms set pension discount rates above the benchmark rates and this phenomenon is more prevalent when interest rates sharply fall. We attribute this to corporate borrowing constraints --- mandatory contributions to underfunded pensions constrain corporate investments, thus a relaxation of such constraint through setting higher pension discount rates helps to improve firm value. Consistent with this idea, we find higher discount rates help to improve investments of underfunded firms, particularly for financially constrained firms most vulnerable to lower rates. Imperfect elasticity of pension discount rates to market interest rates offers firms leeway to alleviate the constraints from defined benefit pension plans.

Keywords: Pension discount rate, Low interest rate, Pension liabilities

JEL Classification: G11, G22

Suggested Citation

chu, liping and Goldstein, Michael A. and Li, Xin and Yu, Tong, Do Corporates Set Pension Discount Rates Strategically? (June 15, 2020). Available at SSRN: https://ssrn.com/abstract=3627965 or http://dx.doi.org/10.2139/ssrn.3627965

Liping Chu

affiliation not provided to SSRN

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)

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

College of Business Administration
Cincinnati, OH 45221
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)

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