Pension risk and corporate investment distortion

Demian Berchtold, Oliver Dichter, Claudio Loderer and Urs Waelchli

Journal of Corporate Finance, 2021, vol. 68, issue C

Abstract: Failure to correct for pension risk leads to upward-biased discount rate estimates in firms with pension risk exposure. The result is a negative and economically significant relation between pension risk and corporate investment. The effect is confined to investment decisions that require discount rate estimates. Moreover, it is stronger if project value is more sensitive to such estimates. Because of this bias, firms miss valuable investment opportunities. The results survive robustness tests that address endogeneity concerns and alternative interpretations of the evidence. The general implication is that non-operating risks can distort, if ignored, corporate investment decisions.

Keywords: Pension risk; Defined benefit pension plan; Corporate investment; Capital budgeting; Cost of capital (search for similar items in EconPapers)
JEL-codes: G23 G31 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:68:y:2021:i:c:s0929119921000535

DOI: 10.1016/j.jcorpfin.2021.101932

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