Working Paper: NBER ID: w1602
Authors: Jeremy Bulow; Randall Morck; Lawrence Summers
Abstract: We lead off by discussing a number of theoretical reasons for expecting various relationships between a firm's unfunded pension liability and its market value. We then discuss our doubts about the methodology of earlier papers which studied the empirical relation between funding and market value using standard cross sectional techniques. A modified cross sectional approach which alleviates some of these doubts, and a variable effect event study methodology which alleviates most of them are both employed to investigate the issues raised in the first part of the paper. Our conclusion confirms those of earlier studies that unfunded pension liabilities are accurately reflected in lower share prices.
Keywords: pension liabilities; market valuation; corporate finance; national savings
JEL Codes: G12; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unfunded pension liabilities (G23) | lower share prices (G19) |
| unfunded pension liabilities (G23) | firm's market value (G32) |
| changes in pension asset values (G23) | firm valuations (G32) |
| reductions in overfunded plans (J32) | stockholders' gains (G35) |
| marginal effect of reduced pension liabilities (J32) | underfunded versus overfunded plans (H55) |