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How Does the Market Value Unfunded Pension Liabilities?

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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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1602.

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Date of creation: Apr 1985
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Publication status: published as Bulow, Jeremy, Randall Morck and Lawrence H. Summers. "How does the Market Value Unfunded Pension Liabilities?" Issues in Pension Eocnomics, edited by Z. Bodie, J. Shoven and D. Wise, Chicago: UCP, 1987.
Handle: RePEc:nbr:nberwo:1602

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Cited by:
  1. 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.
  2. Alicia H. Munnell & Frederick O. Yohn, 1991. "What is the impact of pensions on saving?," Working Papers 91-5, Federal Reserve Bank of Boston.
  3. 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.).
  4. B. Douglas Bernheim & John B. Shoven, 1985. "Pension Funding and Saving," NBER Working Papers 1622, National Bureau of Economic Research, Inc.
  5. Francesco Franzoni & José M. Marín, 2006. "Pension Plan Funding and Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 61(2), pages 921-956, 04.
  6. 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).
  7. James E. Pesando, 1985. "The Usefulness of the Wind-Up Measure of Pension Liabilities: A LabourMarket Perspective," NBER Working Papers 1559, National Bureau of Economic Research, Inc.
  8. Steven G. Allen & Robert L. Clark, 1987. "Pensions and Firm Performance," NBER Working Papers 2266, National Bureau of Economic Research, Inc.
  9. 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.
  10. Zvi Bodie, 1989. "Pension Funds and Financial Innovation," NBER Working Papers 3101, National Bureau of Economic Research, Inc.
  11. 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.
  12. Julia Lynn Coronado & Steven A. Sharpe, 2003. "Did Pension Plan Accounting Contribute to a Stock Market Bubble?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 323-371.
  13. 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.).
  14. Nakajima, Kan & Sasaki, Takafumi, 2010. "Unfunded pension liabilities and stock returns," Pacific-Basin Finance Journal, Elsevier, vol. 18(1), pages 47-63, January.
  15. 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.

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