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Defined benefit company pensions and corporate valuations: simulation and empirical evidence from the United Kingdom

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Kamakshya Trivedi
Garry Young

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Abstract

This paper examines the role of defined benefit company pensions in amplifying the effect of common shocks to companies' stock market valuations. It identifies and evaluates the significance of two channels of amplification: cross-holdings of equities in pension schemes, and leverage induced by pension liabilities. Econometric analysis of weekly stock market data for a sample of FTSE 350 UK companies confirm that these effects are statistically significant and robust to outlying observations.

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Paper provided by Bank of England in its series Bank of England working papers with number 289.

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Handle: RePEc:boe:boeewp:289

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  5. Cocco, Joâo Francisco P.D. & Volpin, Paolo, 2005. "The Corporate Governance of Defined-Benefit Pension Plans: Evidence from the United Kingdom," CEPR Discussion Papers 4932, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Temple, Jonathan, 2000. "Growth Regressions and What the Textbooks Don't Tell You," Bulletin of Economic Research, Blackwell Publishing, vol. 52(3), pages 181-205, July.
  8. Martin Feldstein & Randall Morck, 1983. "Pension Funding Decisions, Interest Rate Assumptions, and Share Prices," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 177-210 National Bureau of Economic Research, Inc. [Downloadable!]
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  9. Jeremy I. Bulow & Lawrence H. Summers & Lawrence H. Summers, 1987. "How Does the Market Value Unfunded Pension Liabilities?," NBER Chapters, in: Issues in Pension Economics, pages 81-110 National Bureau of Economic Research, Inc. [Downloadable!]
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  10. Bhandari, Laxmi Chand, 1988. " Debt/Equity Ratio and Expected Common Stock Returns: Empirical Evidence," Journal of Finance, American Finance Association, vol. 43(2), pages 507-28, June. [Downloadable!] (restricted)
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