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Risk Shifting and Corporate Pension Plans: Evidence from a Natural Experiment

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  • Pedersen, David J.

Abstract

Using a natural experiment to identify the causal effect of an increase in default risk on firm actions, I find little evidence managers shift risk to corporate pension plans following an exogenous shock to the firm’s long-term liabilities. The finding is robust to focusing on firms where the incentive to engage in risk shifting is arguably the greatest, such as financially vulnerable firms and firms with fewer agency conflicts. This study casts doubt on the risk-shifting hypothesis and shows managers do not take risk-shifting actions that would increase shareholder value even when those actions pose little threat to managerial utility.

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  • Pedersen, David J., 2019. "Risk Shifting and Corporate Pension Plans: Evidence from a Natural Experiment," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(2), pages 907-923, April.
    • Handle: RePEc:cup:jfinqa:v:54:y:2019:i:02:p:907-923_00
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    Cited by:

    1. Goto, Shingo & Yanase, Noriyoshi, 2021. "Pension return assumptions and shareholder-employee risk-shifting," Journal of Corporate Finance, Elsevier, vol. 70(C).
    2. McKee, Eric, 2022. "Risk-shifting: Evidence from the 2007 credit crisis," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).

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