Defined benefit pension de‐risking and corporate risk‐taking

Brian Silverstein

Financial Management, 2021, vol. 50, issue 4, 1085-1111

Abstract: U.S. corporate sponsors of defined benefit (DB) pension plans in recent years have been de‐risking by paying premiums to transfer their pension plan assets and liabilities to the balance sheets of third‐party insurers. The passage of the Moving Ahead for Progress in the 21st Century Act (MAP‐21) in 2012 provided the pension funding relief necessary to make de‐risking a mainstream corporate activity. This study provides the first empirical analysis of plan and firm factors that cause a firm to de‐risk its DB pension plans. We find a positive association between de‐risking and aggregate corporate risk‐taking. The results also show that de‐risking, on average, has a stronger effect on corporate financing policy than investment policy, leading to an increase in credit risk reflected in a firm's credit rating and cost of debt. Also, we present suggestive evidence that the reallocation of pension risk increases firm idiosyncratic risk and excess returns.

Date: 2021
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