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Underinvestment vs. Overinvestment: Evidence from Price Reactions to Pension Contributions

Author

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  • Francesco A. Franzoni

    (University of Lugano and Swiss Finance Institute)

Abstract

Mandatory contributions to defined benefit pension plans provide a unique identification strategy to estimate the market's assessment of the value of internal resources controlling for investment opportunities. The drop in prices following these cash outflows is magnified for firms that appear a priori more financially constrained, consistent with a negative effect of financing frictions on investment. In contrast, price reactions to pension contributions are positive for poorly governed firms, suggesting that the managers of these companies engage in value-destroying projects. While under- and overinvestment have similar weight in a panel of large firms, the first distortion prevails in a sample that is more representative of the cross-section of listed companies.

Suggested Citation

  • Francesco A. Franzoni, 2008. "Underinvestment vs. Overinvestment: Evidence from Price Reactions to Pension Contributions," Swiss Finance Institute Research Paper Series 08-22, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp0822
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    More about this item

    Keywords

    underinvestment; overinvestment; financial constraints; corporate governance;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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