Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans

56 Pages Posted: 30 Dec 2004  

Joshua D. Rauh

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Abstract

I exploit sharply nonlinear funding rules for defined benefit pension plans in order to identify the dependence of corporate investment on internal financial resources in a large sample. Capital expenditures decline with mandatory contributions to defined benefit pension plans, even when controlling for correlations between the pension funding status itself and the firm's unobserved investment opportunities. The effect is particularly evident among firms that face financing constraints based on observable variables such as credit ratings. Investment also displays strong negative correlations with the part of mandatory contributions resulting solely from unexpected asset market movements.

Suggested Citation

Rauh, Joshua D., Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans. AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=641825 or http://dx.doi.org/10.2139/ssrn.641825

Joshua D. Rauh (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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