Do Corporates Set Pension Discount Rates Strategically?

48 Pages Posted: 9 Jul 2020 Last revised: 21 Jul 2020

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

A significant number of the U.S. publicly listed firms fail to lower their discount rates used to discount future pension obligations when interest rates decrease, resulting in an understatement of their pension liabilities and a lower charge against corporate earnings. Following the idea that mandatory contributions to underfunded pensions constrain corporate investments, we model and present empirical evidence that a relaxation of such constraint by setting higher pension discount rates helps to improve firm value. We show that rate inflations concentrate among highly capital intensive corporates who are facing tight financing constraints. We also show that such behavior has a positive effect on the operating and stock performance of underfunded firms, which supports the view that the 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, Earnings management, 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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