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Underfunding or distress? An analysis of corporate pension underfunding and the cross-section of expected stock returns

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  • Tao, Qizhi
  • Chen, Carl
  • Lu, Rui
  • Zhang, Ting

Abstract

The pension underfunding anomaly (Franzoni & Marín, 2006) is mainly concentrated in financially distressed sponsors. The predictability of pension underfunding levels on the cross-sectional stock returns disappears after considering sponsor financial distress. It exists when underfunding is primarily due to poor operating performance and during the initial five years of underfunding; it diminishes when underfunding is due to bad pension investment returns and when firms underfund for more than five years. The potential financial distress inherent in the most underfunded firms and the prospect of intervention by the Pension Benefit Guaranty Corporation make the arbitrage opportunity not entirely risk free.

Suggested Citation

  • Tao, Qizhi & Chen, Carl & Lu, Rui & Zhang, Ting, 2017. "Underfunding or distress? An analysis of corporate pension underfunding and the cross-section of expected stock returns," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 116-133.
    • Handle: RePEc:eee:reveco:v:48:y:2017:i:c:p:116-133
    DOI: 10.1016/j.iref.2016.11.009
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    Cited by:

    1. Heusel, Nicola & Mager, Ferdinand, 2023. "Pension funding and the cross section of stock returns - The case of Germany," Journal of Banking & Finance, Elsevier, vol. 150(C).

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    More about this item

    Keywords

    Financial distress; Pension underfunding; Cross-section of stock returns; Expected default frequency;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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