Pension Plan Funding and Stock Market Efficiency

50 Pages Posted: 16 Sep 2004 Last revised: 16 Nov 2008

See all articles by Francesco A. Franzoni

Francesco A. Franzoni

Universita della Svizzera italiana (USI Lugano); Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Jose M. Marin

Charles III University of Madrid

Multiple version iconThere are 2 versions of this paper

Date Written: September 14, 2004


As a consequence of the recent bear stock market, the aggregate funding level of defined benefit pension plans has tremendously deteriorated. A relevant issue is whether the market value of the firms sponsoring these plans reflects their pension liabilities. In sharp contrast with earlier studies, this paper presents evidence indicating that the market has significantly overpriced firms with severely underfunded pension plans. We show that these companies earn lower stock returns than firms with healthier pension plans, and the underperformance persists for at least five years after the first emergence of the large underfunding. Moreover, the low returns are not explained by risk, return momentum, earnings momentum, or accruals. For this reason, we conclude that we have identified an additional layer of mispricing. We propose an explanation where investors do not anticipate the impact of the pension liability on future earnings and cash flows, and they are surprised when the negative implications of underfunding finally materialize. Consistent with this view, we provide significant evidence of market surprises for severely underfunded firms. Finally, we characterize these firms as past losers which, although value companies, pay low returns.

Keywords: Asset Pricing, Market Efficiency, Alpha, Anomalies, Mispricing, Pension Plans, Pension Accounting, Pension Shortfall

JEL Classification: G12

Suggested Citation

Franzoni, Francesco A. and Marin, Jose M., Pension Plan Funding and Stock Market Efficiency (September 14, 2004). Available at SSRN: or

Francesco A. Franzoni (Contact Author)

Universita della Svizzera italiana (USI Lugano) ( email )

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

Jose M. Marin

Charles III University of Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903


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