Pension Policy and the Value of Corporate-Level Investment

We examine how pension policy affects the value of corporate-level investment to the firm and its various claimants using Monte Carlo simulation. Shareholders lose the greatest amount of project value to the pension plan when it is undiversified across asset classes. Improved funding levels mandated...

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Bibliographic Details
Published inFinancial management Vol. 42; no. 2; pp. 413 - 440
Main Authors Alderson, Michael J., Seitz, Neil L.
Format Journal Article
LanguageEnglish
Published Melbourne, Australia Blackwell Publishing Asia 01.06.2013
Wiley Subscription Services, Inc
Financial Management Association
Blackwell Publishing Ltd
Subjects
Bonds
Corporate investments
Defined benefit pension plan
Financial analysis
Financial investments
Funding
Investment
Investment risk
Investment value
Investments
Laws, regulations and rules
Management
Monte Carlo method
Monte Carlo simulation
Pension funds
Pension liabilities
Pension plans
Pension Protection Act 2006-US
Pensions
Shareholders
Stocks
Studies
United States
United States > US
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Summary:We examine how pension policy affects the value of corporate-level investment to the firm and its various claimants using Monte Carlo simulation. Shareholders lose the greatest amount of project value to the pension plan when it is undiversified across asset classes. Improved funding levels mandated by the provisions of the Pension Protection Act of 2006 generally reduce those wealth transfers. Thus, mitigation of the overhang effect joins the reduction of financial distress costs as a motivation for holding both stocks and bonds in the pension fund.
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We thank John T. Alderson of Towers Watson, Brian Betker, Bidisha Chakrabarty, Bill Christie (Editor) and an anonymous reviewer for helpful comments and suggestions. We are also grateful to John Graham for providing us with the marginal income tax rates used in the study. An earlier version of this paper was presented at the 2011 FMA Conference (Denver). All errors remain our own.
Michael J. Alderson is a Professor of Finance in the Department of Finance at Saint Louis University in St. Louis, MO. Neil L. Seitz is a Professor of Finance in the Department of Finance at Saint Louis University in St. Louis, MO.
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ISSN:0046-3892
1755-053X
DOI:10.1111/fima.12008