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Pension Funding Decisions, Interest Rate Assumptions, and Share Prices

In: Financial Aspects of the United States Pension System

  • Martin Feldstein
  • Randall Morck

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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This chapter was published in:
  • Zvi Bodie & John B. Shoven, 1983. "Financial Aspects of the United States Pension System," NBER Books, National Bureau of Economic Research, Inc, number bodi83-1, August.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 6032.
    Handle: RePEc:nbr:nberch:6032
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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