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Pension Funding Decisions, Interest Rate Assumptions and Share Prices

  • 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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File URL: http://www.nber.org/papers/w0938.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0938.

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Date of creation: Jul 1982
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Publication status: published as Bodie, Zvi and John B. Shoven (eds.) Financial Aspects of the U.S. Pension System. Chicago: University of Chicago Press, 1983.
Handle: RePEc:nbr:nberwo:0938
Note: PE
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  1. Oldfield, George S, Jr, 1977. "Financial Aspects of the Private Pension System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 48-54, February.
  2. Irwin Tepper, 1981. "Taxation and Corporate Pension Policy," NBER Working Papers 0661, National Bureau of Economic Research, Inc.
  3. Jeremy I. Bulow, 1979. "Analysis of Pension Funding Under Erisa," NBER Working Papers 0402, National Bureau of Economic Research, Inc.
  4. Martin Feldstein, 1983. "Inflation and the Stock Market," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 186-198 National Bureau of Economic Research, Inc.
  5. Tepper, Irwin, 1981. "Taxation and Corporate Pension Policy," Journal of Finance, American Finance Association, vol. 36(1), pages 1-13, March.
  6. Fischer Black, 1980. "The Tax Advantages of Pension Fund Investments in Bonds," NBER Working Papers 0533, National Bureau of Economic Research, Inc.
  7. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  8. Feldstein, Martin & Green, Jerry, 1983. "Why Do Companies Pay Dividends?," American Economic Review, American Economic Association, vol. 73(1), pages 17-30, March.
  9. Lawrence H. Summers, 1982. "The Nonadjustment of Nominal Interest Rates: A Study of the Fisher Effect," NBER Working Papers 0836, National Bureau of Economic Research, Inc.
  10. Martin Feldstein & Stephanie Seligman, 1980. "Pension Funding, Share Prices, and National Saving," NBER Working Papers 0509, National Bureau of Economic Research, Inc.
  11. Mark Gersovitz, 1980. "Economic Consequences of Unfunded Vested Pension Benefits," NBER Working Papers 0480, National Bureau of Economic Research, Inc.
  12. Feldstein, Martin S, 1978. "The Rate of Return, Taxation and Personal Savings," Economic Journal, Royal Economic Society, vol. 88(351), pages 482-87, September.
  13. Laurence J. Kotlikoff & Daniel E. Smith, 1983. "Pensions in the American Economy," NBER Books, National Bureau of Economic Research, Inc, number kotl83-1.
  14. Laurence J. Kotlikoff & Daniel E. Smith, 1983. "Introduction to "Pensions in the American Economy"," NBER Chapters, in: Pensions in the American Economy, pages 1-19 National Bureau of Economic Research, Inc.
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