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.