How does the Funding Status of Defined Benefit Pension Plans Affect Investment Decisions of Firms in the United States?

We investigate whether the flexibility in making contributions towards defined benefit pension plans sponsored by firms in the United States allows managers to save cash and increase investments. Firms invest more at higher levels of pension deficit, defined as pension benefit obligations less pension assets, and scaled by total assets. At the median level (90^th percentile) of pension deficit, investments increase by 6.7 cents (9.4 cents) for every dollar increase in cash. As the pension deficit increases, firms deviate more from the predicted level of investment. These findings suggest that the incremental investments are more likely to represent overinvestment by managers. Our results are robust to alternative model specifications and endogeneity concerns that may arise if investments are jointly determined with the funding policy of pension plans and the firm's target cash level. We repeat our main analysis for the United Kingdom and also find for that country that, at a fixed cash level, total investment increases as pension deficit increases.     

Unfunded pension liabilities and stock returns

This paper investigates whether the market rationally anticipates the value implications of unrecognized pension obligations, using a large sample of Japanese firms where pension obligations are substantially underfunded. If a firm's unrecognized pension obligation is not incorporated into its share price, its stock returns will be lower than those of other firms, because its deficit will affect the firm's income statement in the coming years. We find that firms with large unrecognized obligations earn lower risk-adjusted returns. This evidence suggests that the market does not efficiently incorporate information in the pension items.     

Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans

I exploit sharply nonlinear funding rules for defined benefit pension plans in order to identify the dependence of corporate investment on internal financial resources in a large sample. Capital expenditures decline with mandatory contributions to DB pension plans, even when controlling for correlations between the pension funding status itself and the firm's unobserved investment opportunities. The effect is particularly evident among firms that face financing constraints based on observable variables such as credit ratings. Investment also displays strong negative correlations with the part of mandatory contributions resulting solely from unexpected asset market movements.     

会计信息可比性与企业商业信用融资——基于企业市场地位和行业竞争环境的双重考量

不同于传统的基于资本市场情境进行的会计信息可比性经济后果研究,将研究场景拓展至商品市场中企业供应链层面,考察企业会计信息可比性能否影响供应链伙伴的商业信用政策制定,进而反映到企业的商业信用融资水平.研究发现:会计信息可比性越高的企业,其商业信用融资水平也越高;会计信息可比性对商业信用融资的促进作用只在市场地位较低、所处行业竞争程度较高的企业中存在.进一步的拓展研究证实,提高会计信息可比性可以有效缓解我国中小微企业普遍存在的融资难问题.     

Does Earnings Management Relieve the Negative Effects of Mandatory Pension Contributions?

Mandatory pension contributions (MCs) are negative shocks to a firm's liquidity that can unfavorably impact its cost of capital, financing, and investment plans. We examine whether firms faced with MCs use both noncash (NEM) and cash‐generating earnings management (CEM) to partially offset their negative effects. Firms increase CEM, but not NEM, when they experience MCs. We also find that earnings management associated with MCs does not substantially lower the weighted cost of capital or boost external funding and investment. Our findings suggest that MC firms use CEM as it directly generates cash to fund MCs, while NEM does not.     

Pension Funding Regulations and Actuarial Gains and Losses

With pervasive pension funding deficits, Korean firms have been under pressure to improve their funding levels. We examine whether firms have incentives to set obligation‐decreasing pension assumptions when they have large pension deficits (pension obligations in excess of plan assets) and when they make insufficient contributions to external pension funds. We find that firms report larger actuarial gains (or smaller actuarial losses) associated with the remeasurement of pension liabilities when their pension funding ratio (the ratio of the fair value of plan assets to defined benefit obligations) is lower and when contributions to plan assets relative to pension service costs are smaller. Next, upon the introduction of a minimum pension funding guideline, we find that the effect of the funding ratio and contributions to pension funds on actuarial gains and losses is more pronounced for firms whose funding ratios are slightly below the minimum funding ratio than it is for firms whose funding ratios exceed or fall short of the minimum by a large margin. Our results indicate that firms opportunistically exercise discretion regarding corporate pension accounting under International Financial Reporting Standards to comply with pension funding regulations, thereby reducing perceived pension deficits.     

The Role of the Auditor in Modern Society: An Exploratory Essay

This paper examines competing proprietary and political cost arguments for incentives facing managers of different types of Australian and UK pension fund, to voluntarily disclose pension liability information in annual reports sent to their participants. For Australian defined benefit pension funds, the disclosure reveals the fund's actuarial surplus or deficit, which conveys information to participants about the pension fund's ability to generate future cash flows. Tests are conducted on the voluntary reporting practices of a sample of 119 Australian and 100 UK pension funds, using variables which prior research suggests affects their financial valuation and performance. The empirical results support predictions that managerial discretionary disclosure carries proprietary cost implications for Australian defined benefit pension funds, as proxied by their investment risk and funding ratio, and political cost implications for Australian defined contribution and UK defined benefit pension funds, as proxied by their size.     

The Tax Consequences of Long‐Run Pension Policy*

A firm's pension fund is legally separate from the firm. But because pension benefits are normally independent of fund performance, pension assets impact the firm very much as if they were firm assets. Because they are worth more when times are good and less when times are bad, common stocks in the pension fund add to the sponsoring firm's leverage. They cause contributions to a pension fund to be high just when the firm can least afford to pay them. Conversely, bonds in the pension fund will make it easier for the firm to avoid default on its own bonds when times are bad all over: The more bonds a pension fund buys, the more the firm can borrow. The tax treatment accorded the pension fund differs notably from that accorded the firm. Some have argued that a firm can capitalize on the difference by accelerating the funding of its pension plan. The benefits of full funding are wasted, however, unless the added contributions to the fund are invested in bonds; higher pension contributions now mean lower contributions later, hence higher taxes later. The benefits come from earning, after taxes, the pretax interest rate on the bonds in the pension fund. If the firm wants to take advantage of the differing tax treatment of bonds without altering the level of its current pension contributions, it can (1) sell stocks in the pension fund and then buy bonds with the proceeds while (2) issuing debt in the firm and buying back its own shares with the proceeds. An investment in the firm's own stock creates no more tax liability than an investment in stocks through the pension fund.     

Determinants of Actuarial Valuation Method Changes for Pension Funding and Reporting: Evidence from the UK

This study examines various factors that potentially explain cross‐sectional variations in UK corporate managerial discretion to switch towards a market‐based actuarial pension valuation method for pension funding and reporting purposes. Evidence is based on accounting, actuarial and share market data for an industry‐matched pair sample of 90 UK firms. Consistent with our hypotheses we find that companies have a greater propensity to switch actuarial methods if they use lower discount rates, lower flow funding ratios and sponsor larger pension plans in the pre‐switch valuation year. These findings are consistent with the traditional perspective, which implies that UK corporate switching decisions are explained by characteristics of their defined benefit pension funds. The results run contrary to the findings of earlier US based studies that find that such choices can be explained from an alternative corporate financial perspective.     

Determinants of pension funding and asset allocation decisions

Prior research suggests that the funding and asset allocation decisions for defined benefit pension plans may be based on tax, risk, and profitability factors. Much of the previous empirical work, however, suffers from statistical problems that may produce misleading or contradictory results. We employ a confirmatory factor analytic model to address the statistical problems plaguing pension research. Various competing hypotheses are tested simultaneously. Findings indicate that firms use pensions to offset business risk.An earlier version of this article was presented at the Financial Management Association Meetings held in Toronto, October 1993. Much of the work on this article was done while the authors were at the University of Texas-Arlington.     

A Unified Theory of Tobin's q,Corporate Investment,Financing, and Risk Management

We propose a model of dynamic investment, financing, and risk management for financially constrained firms. The model highlights the central importance of the endogenous marginal value of liquidity (cash and credit line) for corporate decisions. Our three main results are: (1) investment depends on the ratio of marginal q to the marginal value of liquidity, and the relation between investment and marginal q changes with the marginal source of funding; (2) optimal external financing and payout are characterized by an endogenous double‐barrier policy for the firm's cash‐capital ratio; and (3) liquidity management and derivatives hedging are complementary risk management tools.     

The Effect of Regulations on Pension Risk Shifting: Evidence from the US and Europe

This paper provides evidence that pension regulations can incentivize or curb risk shifting in the investment of defined benefit plan assets. We document that in the US, where the pension insurance premium charged by the Pension Benefit Guaranty Corporation is largely flat, financially distressed firms with severely underfunded plans shift pension investment risk. We further find that risk shifting is mitigated in the UK after the implementation of risk‐adjusted pension insurance premiums, and in the Netherlands where full pension funding is mandatory. Overall the results in this paper lend support to the view that structural flaws in the US statutory pension insurance scheme incentivize high‐risk sponsors to gamble their pension assets when distress terminations of their plans become foreseeable.     

Corporate performance and firm perception: The British experience

Previous academic research has presented a theoretical basis for a relationship between attributes of a firm's reputation and its financial performance. For the United States, researchers have analysed the correspondence between market and accounting based measures of US firm performance and external evaluators' perceptions of the qualitative attributes of US firms. In this study, expert surveys on the qualitative performance of British firms conducted by the British publication, the Economist, which are similar in content to surveys conducted by Fortune magazine for US firms, are used to determine the correspondence between qualitative and quantitative measures of British firms' performance. Results indicate that differences may exist between US and Britain in the use of qualitative survey data on a firm's strategic attributes as a forecast of a firm's future quantitative performance measures. Results also indicate that for small firms, certain qualitative factors (e.g. capacity to innovate) may be of greater importance in forecasting accounting and security market returns.     

Do pension buyouts help or hurt employees (retirees)?

This article compares expected pension default losses of employees and retirees before and after pension buyouts. The comparisons are made using a stochastic model calibrated with market data. The analysis shows that the lower protection level provided by the State Guarantee Association relative to that of the Pension Benefit Guaranty Corporation (PBGC) is a critical factor that explains the welfare reduction, or equivalently, larger expected pension default losses, of most retirees who become annuity holders in the buyouts. The analysis also shows that the employee welfare, or equivalently expected pension default gains or losses, depends on the continued PBGC protection and, critically, their employers' postbuyout default risk and pension funding status. Moreover, these employee welfare changes are quite different for the corporations included in this analysis. Our results suggest that welfare improvements depend on the PBGC and state insurance regulators' cooperation in protecting pension participants and supervising buyout insurers.     

西方养老金最优化管理研究综述

养老金管理作为保险精算、金融数学的重要研究内容得到了广泛关注,特别是老龄化严重或正趋于老龄化的国家,更应重视养老金的管理。基于对DB型养老金、DC型养老金及其相关问题的现有研究成果进行系统梳理,分析讨论了西方养老金最优化管理的发展历史、研究现状及存在的问题,并据此提出未来可能的研究方向,希望能对相关研究者和保险企业提供...     

More than words: Can tone of consumer product reviews help predict firms’ fundamentals?

Although financial market participants are increasingly interested in the financial value of unstructured qualitative information regarding the prospects of a firm, empirical evidence remains sparse on the properties of qualitative content in consumer product reviews and their capital market implications. Using a broad sample of consumer reviews posted on Amazon.com, I examine whether the linguistic tone of aggregate consumer product reviews conveys information that is associated with firms’ sales, earnings, stock returns and risk. I find that aggregate review tone successfully predicts a firm's forthcoming quarterly sales. Moderating analyses show that this predictability is stronger for firms operating in a highly competitive environment. I further find that review tone predicts a firm's quarterly earnings surprises, abnormal stock returns and risk. A path analysis shows that the effect of review tone on stock prices is partially channeled through its effect on firms’ earnings. I finally find that negative review tone is more informative and useful than positive tone in predicting a firm's fundamentals. Importantly, these results hold after controlling for other review characteristics, including review rating, review volumeand review dispersion. Overall, my findings highlight the importance of considering the tone of consumer reviews when evaluating a firm's prospects and value.     

Audit firm's Confucianism and stock price crash risk: Evidence from China

This study examines the association between audit firm's Confucianism and stock price crash risk. We postulate that Confucian moral standards predict a mixed relationship between audit firm's Confucianism and stock price crash risk. Using a large sample of listed firms in China during 2006–2018, we find that audit firm's Confucianism is positively related with client's future stock price crash risk, implying that Confucianism of audit firm aggravates client's bad news hoarding behavior. The effect is more pronounced for client without female auditors and/or with closer personal relationship with auditors. Mechanism analysis shows that audit firm's Confucianism exacerbates crash risk by worsening audit quality and information transparency. Political discipline and external monitoring help to alleviate the negative influence of audit firm's Confucianism on stock price crash risk.     

Incentives for Managing Accounting Information: Property-Liability Insurer Stock-Charter Conversions

Incentives to manage accounting information are examined within 63 property‐liability insurance company conversions from mutual ownership to common stock charter. In the conversion process, policyholders' embedded equity claims must be valued. Since mutuals have no separately traded equity, accounting numbers are a critical input in this valuation. Incentives for surplus management vary across firms; the strongest evidence of surplus management is observed among firms where the mutual's executives become the firm's principal stockholders following conversion. The evidence suggests that converting firms manage accounting information primarily by adjusting liabilities and selectively establishing investment losses—not by altering claims settlement policy.     

The Association between Board Composition and Corporate Pension Policies

This study examines the role of board composition in the determination of pension policies. The results suggest that the proportion of outside directors serving on the board is positively related with pension plan funding levels. In addition, the proportion of outside directors mitigates the relation between financial distress risk and plan underfunding. Last, as firms approach distress, boards with a greater proportion of outside directors tend to allocate a lower fraction of plan assets to riskier securities. Together, our findings suggest that outside directors are mindful of their obligations toward pension plan beneficiaries.     

THE RELATION AMONG DIVIDEND POLICY,FIRM SIZE,AND THE INFORMATION CONTENT OF EARNINGS ANNOUNCEMENTS

In this paper we investigate the role of dividends in explaining the size effect. The previous literature concludes that before the firm's earnings announcement, small firm stock prices impound less information than large firm stock prices. This size effect is evidenced by the greater market reaction to small firm earnings announcements than to large firm earnings announcements. We find that if the dividend announcement precedes the earnings announcement, no size effect exists. The implication is that the information conveyed by dividend announcements includes the information conveyed to investors in large firms by other information sources. However, if the firm does not pay dividends or if the firm's earnings announcement precedes its dividend announcement, the size effect exists. The implication is that dividends do not completely explain the size effect. That is, there are information sources other than dividends that are exclusively available to investors in large firms, and the information provided by these sources is reflected in the stock price of large firms before the earnings announcement.