Equity Valuation Effects of the Pension Protection Act of 2006*

Campbell, John L.; Dhaliwal, Dan S.; Schwartz, William C.

doi:10.1111/j.1911-3846.2010.01015.x

Cited by 41 publications

(32 citation statements)

References 36 publications

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“…Our results are robust to alternative measurement of mandatory pension contributions as suggested by Campbell, Dhaliwal, and Schwartz (2010). Moreover, to ensure the results do not suffer from any cross-sectional and/or auto correlational biases, we run the regression analyses following Fama and Macbeth (1973), which yield similar results.…”

Section: Introductionmentioning

confidence: 82%

“…To check the robustness of our findings, we use two alternative measurements of mandatory pension contributions estimated from Campbell et al (2010). The first measure (MC_PENSEXP) is defined as service cost divided by the firm's total assets as of year t-1 if a firm's pension benefit obligation is larger than its fair value pension assets (PBO>FVPA), and zero otherwise.…”

Section: Additional Measurement Of Voluntary Contributionsmentioning

confidence: 99%

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Pension Contributions and Earnings Quality

Kim

Sun

2013

Rev. Pac. Basin Finan. Mark. Pol.

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We investigate whether defined benefit (DB) pension contributions convey information about earnings quality proxied by different measurements of discretionary accruals. We find that earnings quality is positively associated with total pension contributions. More interestingly, we document a positive but statistically stronger relation between earnings quality and voluntary pension contributions. In contrast, our evidence does not suggest that a similar relationship holds for earnings quality and mandatory pension contributions. Our results are consistent with the theoretical argument that voluntary pension contributions is indicative of firms' earnings quality since both the voluntary pension contributions and earnings quality result from the same set of incentives behind managerial discretions. Our study sheds light on the management's motivation for making voluntary pension contributions and improves our understanding of firms' consideration in funding strategies for DB pension plans.

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Section: Introductionmentioning

confidence: 82%

Section: Additional Measurement Of Voluntary Contributionsmentioning

confidence: 99%

Pension Contributions and Earnings Quality

Kim

Sun

2013

Rev. Pac. Basin Finan. Mark. Pol.

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“…10 9 Furthermore, in this literature payments are treated as mandatory but sometimes there is leeway. 10 See also Campbell, Dhaliwal & Schwartz. (2010), who find that the stock market return response to the Pension Protection Act of 2006 that required firms to increase their contributions and fully fund their pension plans in seven years was more negative for firms that prior to the passage of the act had higher capital expenditures.…”

Section: Risk Managementmentioning

confidence: 97%

Corporate Pension Plans

Cocco

2014

Annu. Rev. Financ. Econ.

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This article reviews the rich and vast literature on defined-benefit (DB) corporate pension plans. The analysis of how firms react to the taxation and regulation of pension plans and to the guarantees provided by the government has allowed researchers to test alternative corporate finance theories, including risk-shifting and risk management. The difficulty in measuring the value of pension liabilities has motivated the study of whether such liabilities are reflected in the cost of capital and in the value of sponsoring firms. The study of the sponsoring firms' reaction to mandatory pension contribution has provided evidence on financing constraints and on the free-cash-flow hypothesis. Pension plan terminations and freezes have shed light on the nature of the employment contract between the firm and workers.

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“…Campbell, Dhaliwal and Schwartz (2012) find that financially constrained firms facing an increase in mandatory contributions also face an increase in cost of capital. In an event study surrounding the date of the introduction of PPA 2006, when minimum funding rules were tightened, Campbell, Dhaliwal and Schwartz (2010) Accordingly, Campbell, Dhaliwal and Schwartz (2010) examine the data to see whether the equity valuation of corporate sponsors with higher marginal tax rates responds to the adoption of the new legislation. Their study reveals a positive effect on the stock returns of such firms.…”

Section: Pension Fundingmentioning

confidence: 99%

“…For funding purposes, the U.S. Pension Protection Act 2006 requires underfunding to be measured using a metric for which the PBO is a very close proxy (Shivdasani and Stefanescu 2010;Campbell, Dhaliwal and Schwartz 2010).…”

Section: Pension Liabilitiesmentioning

confidence: 99%

Tail risk in pension funds: an analysis using ARCH models and bilinear processes

Owadally

2013

Rev Quant Finan Acc

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Citation: Owadally, I. (2014). Tail risk in pension funds: An analysis using ARCH models and bilinear processes. Review of Quantitative Finance and Accounting, 43(2), pp. 301-331. doi: 10.1007/s11156-013-0373-9 This is the accepted version of the paper.This version of the publication may differ from the final published version. Abstract Pension funding rules and practice contain implicit smoothing and counter-cyclical mechanisms. We set up a stylized model to investigate whether this may give rise to tail risk, in the form of large but rare losses, when pension liabilities are imperfectly but optimally hedged by pension fund assets. We find that pension losses follow a nonlinear dynamic process, and we derive a complete description of the stochastic properties of this process using Markov chain and bilinear stochastic process theory. The resulting pension dynamics resembles that of a modified ARCH model, which Permanentsuggests that bursts in volatility may occur, and tail risk may be present. Simulations confirm that pension losses exhibit skewness, leptokurtosis and heavy tails, specially when cash flow smoothing is pronounced. Regulators and investors should be aware of the total amount of smoothing in pension funds as this may contribute to extreme losses, which may adversely affect the security of employee benefits as well as the valuation of firms with corporate pension plans.

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Equity Valuation Effects of the Pension Protection Act of 2006*

Cited by 41 publications

References 36 publications

Pension Contributions and Earnings Quality

Pension Contributions and Earnings Quality

Corporate Pension Plans

Tail risk in pension funds: an analysis using ARCH models and bilinear processes

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