Do Corporates Set Pension Discount Rates Strategically?

55 Pages Posted: 9 Jul 2020 Last revised: 8 Apr 2021

See all articles by Liping Chu

Liping Chu

Shanghai University of International Business and Economics

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

Corporations reduce the magnitude of their pension contributions through their choice of pension liability discount rates, but do so asymmetrically: firms are slow to drop the rates when corporate bond rates drop, but raise them rapidly when rates rise. This effect varies across firms due to heterogeneity in firm investment productivity and financing constraints that constrain corporate investments, particularly in years of low interest rates which significantly inflate pension liabilities, imposing negative external shocks to corporate investments. Corporations' ability to set higher discount rates thus improves investments of underfunded firms.

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

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)

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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