Hostname: page-component-586b7cd67f-gb8f7 Total loading time: 0 Render date: 2024-11-22T07:30:23.430Z Has data issue: false hasContentIssue false
  • English
  • Français

Pension plan risk-taking: does it matter if the sponsor is publicly-traded?

Published online by Cambridge University Press:  12 November 2012

CHRISTINA ATANASOVA  and
EVAN GATEV
CHRISTINA ATANASOVA*
Affiliation:
Beedie school of Business, Simon Fraser University, 8888 University Drive, Burnaby, V5A 156, Canada
EVAN GATEV*
Affiliation:
Beedie school of Business, Simon Fraser University, 8888 University Drive, Burnaby, V5A 156, Canada
*
(e-mail: [email protected]
[email protected])
Get access Rights & Permissions [Opens in a new window]

Abstract

We use a large sample of defined benefit (DB) pension plans to document economically significant differences in the risk-taking of plans sponsored by privately-held versus publicly-traded firms. The magnitude and the main determinants of pension plan risk-taking are different for public and private firms. The effect of pension liabilities’ funded status on risk-taking is two and a half times higher for plans with publicly-traded sponsors than for plans with private sponsors. In contrast, changing sponsor contributions has more than four times higher effect on risk-taking for plans with private sponsors. The results suggest that the alignment of incentives for the stakeholders in a pension contract is different for plans sponsored by private versus publicly-traded firms.

Keywords

Risk-takingpension plansownership
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 12 , Issue 2 , April 2013 , pp. 218 - 249
Copyright
Copyright © Cambridge University Press 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Amir, E. and Benartzi, S. (1998) The expected rate of return on pension funds and asset-allocation as predictors of portfolio performance. Accounting Review, LXXIII: 335–352.Google Scholar
Angrist, J. and Pischke, J. (2008) Mostly Harmless Econometrics: An Empiricist's Companion. Princeton, NJ: Princeton University Press.Google Scholar
Bader, L. N. (1991) The Financial Executive's Guide to Pension Plans. New York: Salomon Brothers, Inc.Google Scholar
Barry, T. A., Lepetit, L. and Tarazi, A. (2011). Ownership structure and risk in publicly held and privately owned banks. Journal of Banking and Finance, 35: 1327–1340.Google Scholar
Bergstresser, D., Desai, M. and Rauh, J. (2006) Earnings manipulation, pension assumptions, and managerial investment decisions. Quarterly Journal of Economics, 121(1): 157–195.Google Scholar
Bharath, S. T. and Dittmar, A. K. (2006). To be or not to be (public). Using going private transactions to examine why firms go public, Working paper. Available online at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=951710Google Scholar
Black, F. (1980) The tax consequences of long-run pension policy. Financial Analysts Journal, 36: 25–31.Google Scholar
Bodie, Z., Light, J. O., Morck, R. and Taggart, R. A. (1984) Funding and asset allocation in corporate pension plans: an empirical investigation. NBER Working Paper No. 1315 (March): Cambridge, MA: National Bureau of Economic Research.Google Scholar
Boot, A. W. A., Gopalan, R. and Thakor, A. V. (2006) The entrepreneur's choice between private and public ownership. Journal of Finance, 61: 803–837.CrossRefGoogle Scholar
Brinson, G., Hood, R. and Beebower, G. (1991) Determinants of portfolio performance II: an update. Financial Analysts Journal, 47(3): 40–48.CrossRefGoogle Scholar
Campbell, J. Y. and Viceira, L. M. (2006). Strategic asset allocation for pension plans. In Clark, G., Munnell, A. and Orszag, J. (eds) Oxford Handbook of Pensions and Retirement Income. New York: Oxford University Press.Google Scholar
Chemmanur, T. and Fulghieri, P. (1999) A theory of the going-public decision. Review of Financial Studies, 12: 249–279.Google Scholar
Chevalier, J. and Ellison, G. (1997) Risk taking by mutual funds as a response to incentives. Journal of Political Economy, 105(6): 1167–1200.Google Scholar
Chi, J. (2005) Understanding the endogeneity between firm value and shareholder rights. Financial Management, 34(4): 65–75.Google Scholar
Cocco, J. and Volpin, P. (2007) The corporate governance of defined benefit pension plans: evidence from the United Kingdom. Financial Analysts Journal, 63: 70–83.Google Scholar
Coles, J. L., Daniel, N. D. and Naveen, L. (2006) Managerial incentives and risk-taking. Journal of Financial Economics, 79: 431–468.Google Scholar
Comprix, J. and Muller, K. (2006) Pension Funding Rules and Sponsor Firms’ Risk Taking with Defined Benefit Pension Plan Assets. Working paper.Google Scholar
Coronado, J. L. and Sharpe, S. A. (2003) Did pension plan accounting contribute to a stock market bubble? Brookings Paper on Economy Activity, 1: 323–359.Google Scholar
Demsetz, H. and Lehn, K. (1985). The structure of corporate ownership: causes and consequences. Journal of Political Economy, 93: 1155–1177.Google Scholar
Emmons, W., Gilbert, A. and Yeager, T. (2004) Reducing the risk at small community banks: is it size or geographic diversification that matters? Journal of Financial Services Research, 25(2–3): 259–281.Google Scholar
Esty, B. (1997) Organizational form and risk taking in the savings and loan industry. Journal of Financial Economics, 44: 22–55.Google Scholar
Frank, M. (2002) The impact of taxes on corporate defined benefit plan asset allocation. Journal of Accounting Research, 40(4): 1163–1190.Google Scholar
Franzoni, F. and Marin, J. M. (2006) Pension plan funding and stock market efficiency. Journal of Finance, 61: 921–956.Google Scholar
Friedman, B. M. (1983). Pension funding, pension asset allocation, and corporate finance: evidence from individual company data. In Bodie, Z. and Shoven, J. B. (eds), Financial Aspects of the United States Pension System. Chicago: University of Chicago Press, pp. 107–152.Google Scholar
Gao, H., Kai, Li and Lemmon, Michael (2010) A comparison of CEO pay in public and private US firms. Working paper, University of British Columbia.Google Scholar
Holderness, C. (2009) The myth of diffuse ownership in the United States. Review of Financial Studies, 22(4): 1377–1408.CrossRefGoogle Scholar
John, K., Litov, L. and Yeung, B. (2008) Corporate governance and risk-taking. Journal of Finance, 63: 1979–1728.Google Scholar
Laeven, L. and Levine, R. (2009). Bank governance, regulation and risk taking. Journal of Financial Economics, 93: 259–275.Google Scholar
Lowry, M. and William Schwert, G. (2002). IPO market cycles: bubbles or sequential learning? Journal of Finance, American Finance Association, 57(3): 1171–1200.Google Scholar
Lucas, D. and Zeldes, S. (2006) Valuing and hedging defined benefit pension obligations: the role of stocks revisited. Working Paper.Google Scholar
Ma, L. and Tang, Y. (2012) Portfolio manager ownership and mutual fund risk taking. Georgia State University working paper.Google Scholar
Michael Harrison, J. and Sharpe, W. F. (1983). Optimal funding and asset allocation rules for defined-benefit pension plans. In Bodie, Z. and Shoven, J.B. (eds) Financial Aspects of the United States Pension System. Chicago, IL: University of Chicago Press.Google Scholar
Pagano, M., Panetta, F. and Zingales, L. (1998). Why do companies go public? An empirical analysis. The Journal of Finance, 53: 27–64.CrossRefGoogle Scholar
Pagano, M. and Roell, A. (1998) The choice of stock ownership structure: agency costs, monitoring and the decision to go public. Quarterly Journal of Economics, 113: 187–225.Google Scholar
Pastor, L. and Veronesi, P. (2005). Rational IPO waves. Journal of Finance, 60(4): 1713–1757.Google Scholar
Petersen, Mitchell (1992) Pension reversions and worker-stockholder wealth transfers. Journal of Finance, 107: 1033–1056.Google Scholar
Petersen, Mitchell (1996) Allocating assets and discounting cash flows: pension plan finance. In Fernandez, Phyllis A, Turner, John A. and Hinz, Richard P. (eds), Pensions, Savings, and Capital Markets. Washington, D.C.: U.S. Department of Labor.Google Scholar
Picconi, M. (2006) The perils of pensions: does pension accounting lead investors and analysts astray? The Accounting Review, 81: 925–955.Google Scholar
Rauh, J. (2006) Investment and financing constraints: evidence from the funding of corporate pension plans. Journal of Finance, 61: 33–71.Google Scholar
Rauh, J. (2009) Risk shifting versus risk management: investment policy in corporate pension plans. Review of Financial Studies, 22: 2687–2733.Google Scholar
Rubin, J. (2007). The impact of pension freezes on firm value. Wharton Research Scholars Journal (online).Google Scholar
Ryan, R. and Fabozzi, F. (2002) Rethinking pension liabilities and asset allocation. Journal of Portfolio Management, 28(4):7–15.Google Scholar
Saunders, A., Strock, E. and Travlos, N. (1990) Ownership structure, deregulation, and bank risk taking. Journal of Finance, 45(2): 643–654.Google Scholar
Sharpe, William F. (1976) Corporate pension funding policy. Journal of Financial Economics, 3(2): 183–193.Google Scholar
Shivdasani, Anil and Stefanescu, Irina (2010) How do pensions affect capital structure decisions? Review of Financial Studies, 23: 1287–1323.Google Scholar
Sundaresan, Suresh and Zapatero, Fernando (1997) Valuation, optimal asset allocation and retirement incentives of pension plans. Review of Financial Studies, 10: 631–660.Google Scholar
Treynor, JL. (1977) The principles of corporate pension finance. Journal of Finance, 32: 627–638.Google Scholar
Wright, P., Ferrris, S. and Awasthi, V. (1996) Impact of corporate insider, blockholder, and institutional equity ownership on firm risk-taking. Academy of Management Journal, 39: 441–463.Google Scholar
Zingales, L. (1995) Insider ownership and the decision to go public. Review of Economic Studies, 62: 425–448.CrossRefGoogle Scholar