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Pension Funding Decisions, Interest Rate Assumptions and Share Prices

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Author Info
Martin Feldstein
Randall Morck

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Abstract

This paper explores how unfunded pension obligations affect the market values of firms. Finns appear to choose the interest rate they use in discounting future benefit obligations so as to balance the tax advantages of a low rate against the more healthy looking annual reports a high rate allows. Investors seem to penetrate this ruse and value firms as if obligations were figured at a standard rate. The rate thus used seems to be much lower than current long term interest rates. Pension liabilities are therefore overemphasized by the market. There is also some evidence that pension assets are undervalued. This suggests that growth of the private pension system might increase savings by investors and firms.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0938.

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Date of creation: Apr 1985
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Handle: RePEc:nbr:nberwo:0938

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  1. Zvi Bodie & Jay O. Light & Randall Morck & Robert A. Taggart, Jr., 1986. "Funding and Asset Allocation in Corporate Pension Plans: An Empirical Investigation," NBER Working Papers 1315, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Julia Coronado & Olivia S. Mitchell & Steven A. Sharpe & S. Blake Nesbitt, 2008. "Footnotes Aren't Enough: The Impact of Pension Accounting on Stock Values," NBER Working Papers 13726, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Steven G. Allen & Robert L. Clark, 1987. "Pensions and Firm Performance," NBER Working Papers 2266, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Lila J. Truett & Dale B.Truett, . "Firm Size and Efficiency in the South African Motor Vehicle Industry," Working Papers 0021, College of Business, University of Texas at San Antonio. [Downloadable!]
  5. 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. [Downloadable!]
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  6. B. Douglas Bernheim & John B. Shoven, 1985. "Pension Funding and Saving," NBER Working Papers 1622, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
    • B. Douglas Bernheim & John B. Shoven, 1988. "Pension Funding and Saving," NBER Chapters, in: Pensions in the U.S. Economy, pages 85-114 National Bureau of Economic Research, Inc. [Downloadable!]
  7. Takashi Obinata, 2000. "Choice of Pension Discount Rate in Financial Accounting adn Stock Prices," CIRJE F-Series CIRJE-F-82, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  8. James E. Pesando, 1986. "Discontinuities in Pension Benefit Formulas and the Spot Model of the Labor Market: Implications for Financial Economists," NBER Working Papers 1795, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Kamakshya Trivedi & Garry Young, . "Defined benefit company pensions and corporate valuations: simulation and empirical evidence from the United Kingdom," Bank of England working papers 289, Bank of England. [Downloadable!]
  10. Steven G. Allen & Robert L. Clark, 1985. "Unions, Pension Wealth, and Age-Compensation Profiles," NBER Working Papers 1677, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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