Do a firm's equity returns reflect the risk of its pension plan?

This paper examines the empirical question of whether systematic equity risk of US firms as measured by beta from the capital asset pricing model reflects the risk of their pension plans. There are a number of reasons to suspect that it might not. Chief among them is the opaque set of accounting rules used to report pension assets, liabilities, and expenses. Pension plan assets and liabilities are off-balance sheet and are often viewed as segregated from the rest of the firm, with its own trustees. Pension accounting rules are complicated. Furthermore, the role of the Pension Benefit Guaranty Corporation clouds the real relation between pension plan risk and firm equity risk. The empirical findings in this paper are consistent with the hypothesis that equity risk does reflect the risk of the firm's pension plan despite arcane accounting rules for pensions. This finding is consistent with informational efficiency of the capital markets. It also has implications for corporate finance practice in the determination of the cost of capital for capital budgeting. Standard procedure uses de-leveraged equity return betas to infer the cost of capital for operating assets. But the de-leveraged betas are not adjusted for the risk of the pension assets and liabilities. Failure to make this adjustment typically biases upward estimates of the discount rate for capital budgeting. The magnitude of the bias is shown here to be large for a number of well-known US companies. This bias can result in positive net present value projects being rejected.     

The impact of fees on visitation of national parks

This study assesses the impact of the change in revenue management policy (namely the increased public land recreation fees) on the number of domestic and international travelers that visit the large, mostly well-known US National Park System sites. Baseline, multivariate demand models were developed based on secondary data from 10 years prior to the fee policy change, and were used to predict demand in years following the fee change. The predictions of the baseline demand models were then compared to the sites’ actual visitation. The differences between the actual and the predicted visitation are statistically significant, indicating that the change in the federal agencies’ revenue management policy might have had an adverse effect on the visitation of the largest US national sites.     

Characterization of the private alternatives domains admitting arrow social welfare functions

An n-person social choice problem is considered in which the alternatives are n dimensional vectors with the ith component of such a vector being the part of the alternative effecting individual i alone. Assuming that individuals are selfish (i is indifferent between any two alternatives that have the same ith component) we characterize all the families of permissible individual preferences that admit nondictatorial Arrow-type social welfare functions. We also show that the existence of such a function for a given family of preferences is independent of n provided that is greater than one.     

Patents and R&D at the firm level: A first report

The U.S. Patent Office has recently computerized its data base. Thus an easily accessible rather direct indicator of the inventive output of firms is now available. We examine the sense in which the patent measure is a ‘good’ indicator of inventive activity by relating it to the R&D expenditures of a cross-section of 121 firms over an 8 year period.     

Conversion of ordinal attitudinal scales: An inferential Bayesian approach

The need for scale conversion may arise whenever an attitude of individuals is measured by independent entrepreneurs each using an ordinal scale of its own with possibly different numbers of (arbitrary) ordinal categories. Such situations are quite common in the marketing realm. The conversion of a score of an individual measured on one scale into an estimated score of a similar scale with a different range is the concern of this paper. An inferential Bayesian approach is adopted to analyze the situation where we believe the scale with fewer categories can be obtained by collapsing the finer scale. This leads to inferences concerning rules for the conversion of scales. Further, we propose a method for testing the validity of such a model. The use of the proposed methodology is exemplified on real data from surveys concerning performance evaluation and satisfaction.     

Commentary: Managing pension and retirement assets: An international perspective

Commentary: Managing pension and retirement assets: An international perspective     

TESTING THE PREDICTIVE POWER OF EX-POST EFFICIENT PORTFOLIOS

Tested here is the hypothesis that portfolios selected from among ex-post efficient assets will attain better results ex-ante than by following the naive strategy of holding an equally weighted portfolio of all the assets. The tests are conducted using the returns of the one hundred mutual funds that were continuously in operation from 1959 to 1980. Ex-post efficient funds are identified using nine investment decision rules (Stochastic Dominance and Mean-Variance rules with and without riskless asset and the Geometric Mean rule). Ex-ante performance is assessed in terms of terminal wealth and expected utility. Results indicate that over the twenty-two years tested, significantly better performance could be attained ex-ante by investing in mutual funds selected by ex-post efficiency analysis using the distribution-free Second- and Third-Degree Stochastic Dominance tests with Riskless Asset as well as by the more traditional Mean-Variance test with Riskless Asset. Excess returns from using ex-post information exceed the substantial transaction costs incorporated in the analysis.