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Risk Shifting and Corporate Pension Plans: Evidence from a Natural Experiment

Published online by Cambridge University Press:  24 August 2018

David J. Pedersen
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Abstract

Using a natural experiment to identify the causal effect of an increase in default risk on firm actions, I find little evidence managers shift risk to corporate pension plans following an exogenous shock to the firm’s long-term liabilities. The finding is robust to focusing on firms where the incentive to engage in risk shifting is arguably the greatest, such as financially vulnerable firms and firms with fewer agency conflicts. This study casts doubt on the risk-shifting hypothesis and shows managers do not take risk-shifting actions that would increase shareholder value even when those actions pose little threat to managerial utility.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 2 , April 2019 , pp. 907 - 923
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

I thank an anonymous referee, Divya Anantharaman, and Jarrad Harford (editor), for thoughtful comments, and Katherine Norris at the Center for Disease Control for help with the data used in this study. Zachary King provided excellent research assistance. I acknowledge partial financial support from the David Whitcomb Center for Research in Financial Services of Rutgers University.

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