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Were internal capital markets affected by the 'perfect' pension storm?

  • Alderson, Michael J.
  • Betker, Brian L.
Registered author(s):

    We examine capital expenditures in multi-segment firms before and after the "perfect storm" that affected pension plans between 2000 and 2002, when bond yields and stock prices both fell precipitously. Our sample of firms went from having overfunded to underfunded pension plans as a result of the storm. We examine the segment-level relation between investment, Tobin's q, and cash flow both before and after the event. We find mixed evidence on the change in the relation between investment and q, which may be a result of measurement error in q. We find stronger evidence for the conclusion that after the pension storm, firms with underfunded pension plans directed more investment towards segments that produce higher cash flow.

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    File URL: http://www.sciencedirect.com/science/article/B6VFK-4V70R8C-1/2/20965859a5f513fa539fe8bb35d0a15b
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    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 15 (2009)
    Issue (Month): 2 (April)
    Pages: 257-271

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    Handle: RePEc:eee:corfin:v:15:y:2009:i:2:p:257-271
    Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

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    1. Ahn, Seoungpil & Denis, David J., 2004. "Internal capital markets and investment policy: evidence from corporate spinoffs," Journal of Financial Economics, Elsevier, vol. 71(3), pages 489-516, March.
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    6. Erickson, Timothy & Whited, Toni M., 2002. "Two-Step Gmm Estimation Of The Errors-In-Variables Model Using High-Order Moments," Econometric Theory, Cambridge University Press, vol. 18(03), pages 776-799, June.
    7. 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.
    8. Joshua D. Rauh, 2006. "Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans," Journal of Finance, American Finance Association, vol. 61(1), pages 33-71, 02.
    9. Lamont, Owen, 1997. " Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 83-109, March.
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