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How Does the Market Value Unfunded Pension Liabilities?

In: Issues in Pension Economics

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  • Jeremy I. Bulow
  • Randall Morck
  • Lawrence H. Summers

Abstract

We lead off by discussing a number of theoretical reasons for expecting various relationships between a firm's unfunded pension liability and its market value. We then discuss our doubts about the methodology of earlier papers which studied the empirical relation between funding and market value using standard cross sectional techniques. A modified cross sectional approach which alleviates some of these doubts, and a variable effect event study methodology which alleviates most of them are both employed to investigate the issues raised in the first part of the paper. Our conclusion confirms those of earlier studies that unfunded pension liabilities are accurately reflected in lower share prices.

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This chapter was published in:

  • Zvi Bodie & John B. Shoven & David A. Wise, 1987. "Issues in Pension Economics," NBER Books, National Bureau of Economic Research, Inc, number bodi87-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 6854.

    Handle: RePEc:nbr:nberch:6854

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    Cited by:
    1. Scott J. Weisbenner, 2000. "Corporate share repurchases in the 1990s: what role do stock options play?," Finance and Economics Discussion Series 2000-29, Board of Governors of the Federal Reserve System (U.S.).
    2. Nakajima, Kan & Sasaki, Takafumi, 2010. "Unfunded pension liabilities and stock returns," Pacific-Basin Finance Journal, Elsevier, vol. 18(1), pages 47-63, January.
    3. Robert Holzmann & Robert Palacios & Asta Zviniene, 2001. "On the Economics and Scope of Implicit Pension Debt: An International Perspective," Empirica, Springer, vol. 28(1), pages 97-129, March.
    4. Atanasova, Christina & Hrazdil, Karel, 2010. "Why do healthy firms freeze their defined-benefit pension plans?," Global Finance Journal, Elsevier, vol. 21(3), pages 293-303.
    5. Julia Coronado & Olivia S. Mitchell & Steven A. Sharpe & S. Blake Nesbitt, 2008. "Footnotes aren’t enough: the impact of pension accounting on stock values," Finance and Economics Discussion Series 2008-04, Board of Governors of the Federal Reserve System (U.S.).
    6. B. Douglas Bernheim & John B. Shoven, 1985. "Pension Funding and Saving," NBER Working Papers 1622, National Bureau of Economic Research, Inc.
    7. Pesando, James E, 1985. " The Usefulness of the Wind-Up Measure of Pension Liabilities: A Labor Market Perspective," Journal of Finance, American Finance Association, vol. 40(3), pages 927-40, July.
    8. Zvi Bodie, 1991. "Pension Funds and Financial Innovation," NBER Working Papers 3101, National Bureau of Economic Research, Inc.
    9. Kamakshya Trivedi & Garry Young, 2006. "Defined benefit company pensions and corporate valuations: simulation and empirical evidence from the United Kingdom," Bank of England working papers 289, Bank of England.
    10. Francesco Franzoni & José M. Marín, 2005. "Pension plan funding and stock market efficiency," Economics Working Papers 871, Department of Economics and Business, Universitat Pompeu Fabra.
    11. Cardinale, Mirko & Orszag, Mike, 2004. "Severance Pay and Corporate Finance: Empirical Evidence from a Panel of Austrian and Italian Firms," IZA Discussion Papers 1383, Institute for the Study of Labor (IZA).
    12. Julia Lynn Coronado & Steven A. Sharpe, 2003. "Did pension plan accounting contribute to a stock market bubble?," Finance and Economics Discussion Series 2003-38, Board of Governors of the Federal Reserve System (U.S.).
    13. Li Jin & Robert Merton & Zvi Bobie, 2004. "Do a Firm's Equity Returns Reflect the Risk of Its Pension Plan?," NBER Working Papers 10650, National Bureau of Economic Research, Inc.
    14. Steven G. Allen & Robert L. Clark, 1987. "Pensions and Firm Performance," NBER Working Papers 2266, National Bureau of Economic Research, Inc.
    15. Alicia H. Munnell & Frederick O. Yohn, 1991. "What is the impact of pensions on saving?," Working Papers 91-5, Federal Reserve Bank of Boston.

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