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Financing Constraints and the Cost of Capital: Evidence from the Funding of Corporate Pension Plans

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  • John L. Campbell
  • Dan S. Dhaliwal
  • William C. Schwartz

Abstract

We investigate the relation between firms' weighted average cost of capital and internal financial resources, using mandatory pension contributions as a proxy for internal financial resources. Rauh (2006) documents a negative association between mandatory pension contributions and capital expenditures. We find that an increase in mandatory pension contributions increases the cost of capital, but only for firms facing greater external financing constraints. Our results suggest that firms' cost of capital is an intervening variable that can explain Rauh's finding that mandatory pension contributions (i.e., internal financing constraints) result in foregone investment. Overall, we provide evidence consistent with recent studies (Rauh 2006; Almeida and Campello 2007) that conclude that financial market frictions affect real economic activity and, in particular, corporate investment. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • John L. Campbell & Dan S. Dhaliwal & William C. Schwartz, 2012. "Financing Constraints and the Cost of Capital: Evidence from the Funding of Corporate Pension Plans," Review of Financial Studies, Society for Financial Studies, vol. 25(3), pages 868-912.
  • Handle: RePEc:oup:rfinst:v:25:y:2012:i:3:p:868-912
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    File URL: http://hdl.handle.net/10.1093/rfs/hhr119
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    Citations

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    Cited by:

    1. Tao, Qizhi & Chen, Carl & Lu, Rui & Zhang, Ting, 2017. "Underfunding or distress? An analysis of corporate pension underfunding and the cross-section of expected stock returns," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 116-133.
    2. repec:bla:jrinsu:v:84:y:2017:i:s1:p:367-392 is not listed on IDEAS
    3. repec:eee:corfin:v:48:y:2018:i:c:p:261-274 is not listed on IDEAS
    4. Brushwood, James & Dhaliwal, Dan & Fairhurst, Douglas & Serfling, Matthew, 2016. "Property crime, earnings variability, and the cost of capital," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 142-173.
    5. repec:spr:jecfin:v:42:y:2018:i:1:d:10.1007_s12197-016-9372-8 is not listed on IDEAS
    6. Takafumi Sasaki, 2015. "The Effects of Liquidity Shocks on Corporate Investments and Cash Holdings: Evidence from Actuarial Pension Gains/Losses," Financial Management, Financial Management Association International, vol. 44(3), pages 685-707, September.
    7. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2014. "Asymmetric adjustment toward optimal capital structure: Evidence from a crisis," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 226-242.
    8. Iqbal Owadally, 2014. "Tail risk in pension funds: an analysis using ARCH models and bilinear processes," Review of Quantitative Finance and Accounting, Springer, vol. 43(2), pages 301-331, August.
    9. repec:eee:corfin:v:46:y:2017:i:c:p:25-33 is not listed on IDEAS
    10. von Beschwitz, Bastian, 2016. "Cash Windfalls and Acquisitions," International Finance Discussion Papers 1159, Board of Governors of the Federal Reserve System (U.S.).
    11. repec:eee:corfin:v:48:y:2018:i:c:p:331-351 is not listed on IDEAS
    12. Michael J. Alderson & Neil L. Seitz, 2013. "Pension Policy and the Value of Corporate-Level Investment," Financial Management, Financial Management Association International, vol. 42(2), pages 413-440, June.
    13. Dhaliwal, Dan & Judd, J. Scott & Serfling, Matthew & Shaikh, Sarah, 2016. "Customer concentration risk and the cost of equity capital," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 23-48.
    14. Gustafson, Matthew T., 2017. "The market sensitivity of retirement and defined contribution pensions: Evidence from the public sector," Journal of Public Economics, Elsevier, vol. 145(C), pages 1-13.
    15. repec:eee:intfin:v:48:y:2017:i:c:p:99-116 is not listed on IDEAS
    16. Mulier, Klaas & Schoors, Koen & Merlevede, Bruno, 2016. "Investment-cash flow sensitivity and financial constraints: Evidence from unquoted European SMEs," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 182-197.
    17. Klaas Mulier & Koen Schoors & Bruno Merlevede, 2014. "Investment-Cash Flow Sensitivity and the Cost of External Finance," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 14/890, Ghent University, Faculty of Economics and Business Administration.

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