Does Freezing a Defined Benefit Pension Plan Affect Firm Risk?

Choy, Hiu Lam; Lin, Jui-Chia; Officer, Micah S.

doi:10.2139/ssrn.2002070

Cited by 9 publications

(8 citation statements)

References 23 publications

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“…Choy, Lin, and Officer [] argue that when a firm declares a hard freeze on its defined benefit pension plans, it stops future accrual of retirement benefits for its managers. An immediate implication is that the percentage of inside debt relative to other compensation components declines over time for firms with pension freezes.…”

Section: Sample Selection and Empirical Resultsmentioning

confidence: 99%

CEO Inside Debt Incentives and Corporate Tax Sheltering

Chi

Huang

Sánchez

2017

J of Accounting Research

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This paper examines the relation between CEO inside debt holdings (pension benefits and deferred compensation) and corporate tax sheltering. Because inside debt holdings are generally unsecured and unfunded liabilities of the firm, CEOs are exposed to risk similar to that faced by outside creditors. As such, theory (Jensen and Meckling [1976]) suggests that inside debt holdings negatively impact CEO risk-appetite. To the extent that corporate tax shelters are likely to result in high cash flow volatility in the future, we expect that inside debt holdings will curb CEOs from engaging in tax shelter transactions. Consistent with the prediction, we document a negative association between CEO inside debt holdings and tax sheltering. Additional analyses suggest that the effect of inside debt on tax sheltering is more (less) pronounced in the presence of high default risk and liquidity threats (cash-out options in pension packages). Overall, our results highlight the importance of investigating the implication of CEO debt-like compensation for corporate tax policies.

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Section: Sample Selection and Empirical Resultsmentioning

confidence: 99%

CEO Inside Debt Incentives and Corporate Tax Sheltering

Chi

Huang

Sánchez

2017

J of Accounting Research

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“…This is consistent with Edmans and Liu (2011), who find that debt-like compensation (e.g., DB pensions) aligns the interests of chief executive officers (CEOs) with debtholders' interests, hence reducing the firm's risk taking. Similarly, Choy et al (2014) show that firms take on more risk following the freezing of DB pension plans. This includes increasing leverage and investment in risky assets (i.e., research and development (R&D) investment).…”

Section: B Endogeneity Between Pension Deficits and Loan Spreadsmentioning

confidence: 94%

“…First, it is relatively difficult to estimate the true liabilities under DB pension plans because contributions are amortized over a number of years. Second, because management has considerable discretion over pension actuarial assumptions, pension obligations are more prone to accounting manipulation (Bergstresser et al (2006), Choy et al (2014), and Comprix and Muller (2011)). This practice potentially obscures the true costs of the DB plan.…”

Section: Significance Of Pension Deficits and Hypothesis Developmentmentioning

confidence: 99%

“…Moreover, we find the effect of pension deficits on loan costs to be stronger when firms adopt a high expected rate of return or a high discount rate. The DB sponsoring firm might use pension assumed rates of return as a tool to manipulate earnings (Bergstresser et al (2006), Choy, Lin, and Officer (2014)). In particular, a higher assumed rate of return reduces the net pension periodic costs.…”

Section: Introductionmentioning

confidence: 99%

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Pension Deficits and the Design of Private Debt Contracts

Balachandran

Duong

2018

J. Financ. Quant. Anal.

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We find a positive relation between the amount of pension deficits and the cost of bank loans. The effect of pension deficits on the cost of bank loans is driven by financial constraints, information-asymmetry problems, and higher pension-investment risk. Banks tighten lending terms for firms with larger pension deficits by requiring collateral, increasing the number of loan covenants, and shortening loan maturity. Borrowers with larger pension deficits are also more likely to violate covenants in the future. Collectively, these findings indicate that pension deficits represent an additional source of risk priced by banks.

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“…Many papers address the effects of managerial incentives, including May (1995); Demski and Dye (1999); Rajgopal and Shevlin (2002);and Coles, Daniel, and Naveen (2006). More recently, the literature has documented that corporate governance (John, Litov, and Yeung, 2008), creditor rights (Acharya, Amihud, and Litov, 2011), shareholder diversification (Faccio, Marchica, and Mura, 2011), and inside debt (Choy, Lin, and Officer, 2014) are important determinants of corporate risk-taking. Bargeron, Lehn, and Zitter (2010) examine how the Sarbanes-Oxley Act of 2002 affected U.S. firm risk-taking.…”

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confidence: 99%

Taxation and Corporate Risk-Taking

Langenmayr

Lester²

2014

SSRN Journal

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We study whether the corporate tax system provides incentives for risky firm investment. We first model the effects of corporate tax rates and tax loss offset rules on firm risk-taking. Testing the theoretical predictions, we find that firm risk-taking is positively related to the length of tax loss periods. This result occurs because the loss rules shift a portion of investment risk to the government, inducing firms to increase their overall level of risk-taking. Moreover, the corporate tax rate has a positive effect on risk-taking for firms that can expect to use their tax losses, and a negative effect for those that cannot. Thus, the effect of taxes on risky investment decisions varies among firms, and its sign hinges on firm-specific expectations of future tax loss recovery.

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Does Freezing a Defined Benefit Pension Plan Affect Firm Risk?

Cited by 9 publications

References 23 publications

CEO Inside Debt Incentives and Corporate Tax Sheltering

CEO Inside Debt Incentives and Corporate Tax Sheltering

Pension Deficits and the Design of Private Debt Contracts

Taxation and Corporate Risk-Taking

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