Hostname: page-component-cb9f654ff-9knnw Total loading time: 0 Render date: 2025-08-05T21:48:58.202Z Has data issue: false hasContentIssue false
  • English
  • Français

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

Published online by Cambridge University Press:  24 August 2018

David J. Pedersen
Get access Rights & Permissions [Opens in a new window]

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.

Information

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 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

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.

References

Anantharaman, D., and Lee, Y.. “Managerial Risk Taking Incentives and Corporate Pension Policy.” Journal of Financial Economics, 111 (2014), 328–351.Google Scholar
Andrade, G., and Kaplan, S.. “How Costly Is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions That Became Distressed.” Journal of Finance, 53 (1998), 1443–1493.Google Scholar
Bureau of Labor Statistics. Employment Data under the New Standard Industrial Classification: First Quarter 1988. Washington, DC: U.S. Department of Labor(1989).Google Scholar
Gilje, E.“Do Firms Engage In Risk Shifting? Empirical Evidence.” Review of Financial Studies, 29 (2016), 2925–2954.Google Scholar
Gormley, T., and Matsa, D.. “Growing Out of Trouble? Corporate Responses to Liability Risk.” Review of Financial Studies, 24 (2011), 2781–2821.Google Scholar
Gormley, T.; Matsa, D.; and Milbourn, T.. “CEO Compensation and Corporate Risk: Evidence from a Natural Experiment.” Journal of Accounting and Economics, 56 (2013), 79–101.Google Scholar
Hadlock, C., and Pierce, J.. “New Evidence on Measuring Financial Constraints: Moving beyond the KZ Index.” Review of Financial Studies, 23 (2010), 1909–1940.Google Scholar
Hernandez-Lagos, P.; Povel, P.; and Sertsios, G.. “An Experimental Analysis of Risk-Shifting Behavior.” Review of Corporate Finance Studies, 6 (2017), 68–101.Google Scholar
Jensen, M., and Meckling, W.. “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.Google Scholar
MacKie-Mason, J. K.“Do Taxes Affect Corporate Financing Decisions? ” Journal of Finance, 45 (1990), 1471–1493.Google Scholar
Myers, S.“Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147–175.Google Scholar
Parrino, R., and Weisbach, M.. “Measuring Investment Distortions Arising from Stockholder-Bondholder Conflicts.” Journal of Financial Economics, 53 (1999), 3–42.Google Scholar
Rauh, J.“Risk Shifting versus Risk Management: Investment Policy in Corporate Pension Plans.” Review of Financial Studies, 22 (2009), 2687–2734.Google Scholar
Sharpe, W.“Corporate Pension Funding Policy.” Journal of Financial Economics, 3 (1976), 183–193.Google Scholar
Treynor, J.“The Principles of Corporate Pension Finance.” Journal of Finance, 32 (1977), 627–638.Google Scholar
Whited, T., and Wu, G.. “Financial Constraints Risk.” Review of Financial Studies, 19 (2006), 531–559.Google Scholar