Managerial Self-Interest, Pension Financial Slack and Corporate Pension Funding

Sudip Datta, Mai E Iskandar-Datta and Edward J Zychowicz

The Financial Review, 1996, vol. 31, issue 4, 695-720

Abstract: This paper examines the impact of managerial self-interest on corporate pension funding decisions. It is postulated that managers with no ownership stake in the firm will have incentives to maintain financial slack in the form of excess pension funding. Pension funding slack may be viewed as a managerial perquisite that decreases the probability of necessary future debt financing. Such a strategy may increase the value of undiversified human capital to the determinant of maximizing shareholder wealth. As managerial ownership increases, the incentives to consume such a perquisite will decrease since the interests of managers and shareholders become more aligned. The results presented in this study strongly support this proposition. Copyright 1996 by MIT Press.

Date: 1996
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