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Pension fund finance and sponsoring companies: empirical evidence on theoretical hypotheses

E Philip Davis (), Sybille Grob and Leo de Haan ()

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: This study presents empirical evidence on the influence of sponsoring companies on the funding and portfolio allocation of pension funds, an issue on which most extant literature is theoretical. We use a unique microdataset of 550 Dutch defined benefit company pension funds and 100 sponsoring firms over 1996-2005 to test the relevance of the main theoretical hypotheses, the first paper to do so in a comprehensive manner. We find that pension funds have lower cover ratios when (1) their sponsoring company is highly leveraged, (2) the fund's return on assets is relatively low, and (3) the sponsoring firm is small. Further, defined benefit pension funds are found to invest more in shares when their sponsoring companies are highly leveraged. These links in general suggest higher risk in the sponsor leads to correspondingly higher risk in the fund, and warrant close attention by regulators.ÂÂÂ

Keywords: Pension funds; Sponsoring company; Capital structure (search for similar items in EconPapers)
JEL-codes: G23 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec and nep-rmg
Date: 2007-12
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Journal Article: Pension fund finance and sponsoring companies (2012) Downloads
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