Pension fund finance and sponsoring companies: empirical evidence on theoretical hypotheses
AbstractThis study presents empirical evidence on the influence of sponsoring companies on the funding and portfolio allocation of pension funds, an issue on which most extant literature is theoretical. We use a unique microdataset of 550 Dutch defined benefit company pension funds and 100 sponsoring firms over 1996-2005 to test the relevance of the main theoretical hypotheses, the first paper to do so in a comprehensive manner. We find that pension funds have lower cover ratios when (1) their sponsoring company is highly leveraged, (2) the fund's return on assets is relatively low, and (3) the sponsoring firm is small. Further, defined benefit pension funds are found to invest more in shares when their sponsoring companies are highly leveraged. These links in general suggest higher risk in the sponsor leads to correspondingly higher risk in the fund, and warrant close attention by regulators.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 158.
Date of creation: Dec 2007
Date of revision:
Pension funds; Sponsoring company; Capital structure;
Other versions of this item:
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-12-19 (All new papers)
- NEP-EEC-2007-12-19 (European Economics)
- NEP-RMG-2007-12-19 (Risk Management)
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