Do Corporates Set Pension Discount Rates Strategically?
48 Pages Posted: 9 Jul 2020 Last revised: 22 Feb 2021
Date Written: June 15, 2020
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: Suggested Citation