Pension risk and corporate investment distortion |
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Institution: | 1. Nottingham University Business School, University of Nottingham, C 02, Business School North Building, Jubilee Campus, Wollaton Rd, Nottingham NG8 1BB, United Kingdom;2. Asian Development Bank Institute, Kasumigaseki Building 8F, 3-2-5 Kasumigaseki, Chiyoda-ku, Tokyo 100-6008, Japan;3. Faculty of Business Administration, University of Macau, Avenida da Universidade, Taipa, Macau |
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Abstract: | Failure to correct for pension risk leads to upward-biased discount rate estimates in firms with pension risk exposure. The result is a negative and economically significant relation between pension risk and corporate investment. The effect is confined to investment decisions that require discount rate estimates. Moreover, it is stronger if project value is more sensitive to such estimates. Because of this bias, firms miss valuable investment opportunities. The results survive robustness tests that address endogeneity concerns and alternative interpretations of the evidence. The general implication is that non-operating risks can distort, if ignored, corporate investment decisions. |
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