Corporate pension plans and investment choices: Bargaining or conforming?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Asian Development Bank InstituteThe Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI's working papers reflect initial ideas on a topic and are posted online for discussion. ADBI encourages readers to post their comments on the main page for each working paper (given in the citation below). Some working papers may develop into other forms of publication. The views expressed in this paper are the views of the author and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.Working papers are subject to formal revision and correction before they are finalized and considered published.Asian Development Bank Institute Kasumigaseki Building, 8th Floor 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, JapanTel: +81-3-3593-5500 Fax:+81-3-3593-5571 URL:www.adbi.org E-mail: info@adbi.org AbstractThis paper investigates the impacts of defined-benefit (DB) pension plans on the corporate investment choices between diversifying and non-diversifying investments. We find a firm's DB plan coverage is negatively associated with its propensity of making a major investment. Subject to a major investment decision, however, the firm with higher DB plan coverage is more likely to diversify, i.e., acquire firms abroad or in other industries, rather than invest in fixed assets or make non-diversifying (i.e., domestic horizontal) acquisitions. Moreover, in diversifying acquisitions, they are more likely to invest in countries or industries with a strongly unionized workforce. Further analysis on post-investment performance shows that firms with higher DB plan coverage experience a greater improvement in operating profitability after a diversifying acquisition, and the improvement mainly comes from a higher asset turnover rather than cost reduction. On the other hand, DB plan sponsoring firms experience a decline in profitability after a large capital expenditure or a non-diversifying acquisition. We propose that both the bargaining motive and the conforming motive can explain these results.

Passive insider trading before pension freezes

“…Labor unions are advocates of DB pension plans, and many plans were collectively bargained for when labor unions were strong. They are the most common proxy for labor bargaining power in the literature (see, e.g., Chang et al, 2012; Duygun et al, 2018; Klasa et al, 2009; Matsa, 2010; Shivdasani & Stefanescu, 2010). In this sense, we predict a negative correlation between the industry unionization rate and probability of a pension freeze, which is confirmed by the first‐stage regression results in Table 8, where we report the IV regression results.…”

The Effects of Corporate Pension Plans on Capital Structure: Evidence from China

“…Endogeneity may exist in the main regression results, possibly caused by companies' aggressive financial policies implemented to improve performance, which leads to the implementation of corporate pension plans. Duygun et al (2018) note that industry characteristics may still simultaneously affect corporate pension plan coverage and firm performance as well as the investment opportunity set. In addition, the same pension plan is offered within each individual province, but pension plans vary greatly among provinces in China.…”

“…Scholars have done much research on the effect of corporate pension plans. Some focus on the investment asset allocation of corporate pension plans (Bicksler and Chen, 1985;An et al, 2013;Duygun et al, 2018;Jnr et al, 2019). For example, Duygun et al (2018) suggest that a firm's DB Plan coverage has a negative relationship with its propensity for making a major investment.…”

“…Some focus on the investment asset allocation of corporate pension plans (Bicksler and Chen, 1985;An et al, 2013;Duygun et al, 2018;Jnr et al, 2019). For example, Duygun et al (2018) suggest that a firm's DB Plan coverage has a negative relationship with its propensity for making a major investment. Firms with higher DB Plan coverage prefer to diversify, that is, to acquire firms abroad or in other industries rather than make fixed-asset investments or domestic horizontal acquisitions.…”

Discounting and the market valuation of defined benefit pensions

“…While the value relevance of DB pensions has been studied extensively in the US context, the literature on 4 See for instance Rauh (2006) that shows how DB pensions aect rms' investment in xed assets and Liu and Tonks (2013) who look at the impact of mandatory contributions to DB pension funds on investment and dividends for UK companies. Alderson and Betker (2009) shows that after the burst of the dotcom bubble rms with underfunded pension scheme redirected investment towards activities that produce higher cash ow, while Duygun et al (2017) nd that DB coverage inuences the propensity of making major investments and the type of such investments. Sasaki (2015) shows that actuarial losses cause a signicant decrease in investment for Japanese manufacturing rms.…”