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Financial health and the valuation of corporate pension plans

Published online by Cambridge University Press:  19 November 2019

Jun Cai ,
Miao Luo  and
Alan J. Marcus
Jun Cai
Affiliation:
Department of Economics and Finance, City University of Hong Kong, Tat Chee Avenue, Kowloon, Hong Kong, P. R. China
Miao Luo
Affiliation:
Department of Finance and Investment, Sun Yat-Sen University, Guangzhou, P. R. China
Alan J. Marcus*
Affiliation:
Department of Finance, Carroll School of Management, Boston College, Chestnut Hill, MA02467, USA
*
*Corresponding author. Email: alan.marcus@bc.edu
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Abstract

We return to the long-standing question ‘Who owns the assets in a defined benefit pension plan?’ Unlike earlier studies, we condition the market's assessment of implicit property rights on the sponsoring firm's financial health. Valuations of financially strong firms, and those that are strengthening, are more responsive to pension plan funding. For these firms, each extra dollar of net plan assets is valued at between $0.50 and $1.00. In contrast, for weak and weakening firms, valuation effects are statistically indistinguishable from zero. This result is consistent with the higher likelihood that they will renege on their pension obligations.

Keywords

Bankruptcy scoresdefined benefit pension plansfinancial distressproperty rightsstock market valuation effectsG23G32
Type
Article
Information
Journal of Pension Economics & Finance , Volume 19 , Issue 4 , October 2020 , pp. 459 - 490
Copyright
Copyright © Cambridge University Press 2019

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