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Underinvestment vs. overinvestment: Evidence from price reactions to pension contributions

  • Franzoni, Francesco
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    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 price decrease following a pension-induced drop in cash is magnified for firms that appear a priori more financially constrained, suggesting a negative effect of financing frictions on investment. In contrast, low control on managerial discretion attenuates the negative price reaction to contributions consistent with empire-building theories. While overinvestment seems to be the prevalent distortion in a panel of large firms, underinvestment appears to dominate in a sample that is more representative of the cross-section of listed companies.

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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 92 (2009)
    Issue (Month): 3 (June)
    Pages: 491-518

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    Handle: RePEc:eee:jfinec:v:92:y:2009:i:3:p:491-518
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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