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What determines corporate pension fund risk-taking strategy?

Heng An, Zhaodan Huang and Ting Zhang

Journal of Banking & Finance, 2013, vol. 37, issue 2, 597-613

Abstract: Corporate sponsors of defined benefit pension plans generally assume low investment risk when they have low funding ratios and high default risk, consistent with the risk management hypothesis. However, for financially distressed sponsors and sponsors that freeze, terminate, or convert defined benefit to defined contribution plans, the risk-shifting incentive (moral hazard) dominates. Pension fund risk-taking is also affected by labor unionization and sponsor incentives to maximize tax benefits, restore financial slack, and justify the accounting choices of pension assumptions. Sponsors shift toward an aggressive risk strategy when their pension plans emerge from underfunding, bankruptcy risk is reduced, or marginal tax rate decreases. Overall, we show that corporate sponsors adopt a dynamic risk-taking strategy in their pension fund investments.

Keywords: Defined benefit pension fund; Pension beta; Funding ratio; Form 5500; Risk shifting; Bankruptcy risk; Pension accounting (search for similar items in EconPapers)
JEL-codes: G11 G23 G32 G34 (search for similar items in EconPapers)
Date: 2013
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