Underinvestment vs. overinvestment: Evidence from price reactions to pension contributions |
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Authors: | Francesco Franzoni |
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Affiliation: | Swiss Finance Institute at the University of Lugano, Via Buffi 13, Lugano 6904, Switzerland |
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Abstract: | Mandatory contributions to defined benefit pension plans provide a unique identification strategy to estimate the market's assessment of the value of internal resources controlling for investment opportunities. The price decrease following a pension-induced drop in cash is magnified for firms that appear a priori more financially constrained, suggesting a negative effect of financing frictions on investment. In contrast, low control on managerial discretion attenuates the negative price reaction to contributions consistent with empire-building theories. While overinvestment seems to be the prevalent distortion in a panel of large firms, underinvestment appears to dominate in a sample that is more representative of the cross-section of listed companies. |
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Keywords: | G32 G34 |
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