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

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