Underinvestment vs. overinvestment: Evidence from price reactions to pension contributions

Francesco Franzoni

Journal of Financial Economics, 2009, vol. 92, issue 3, 491-518

Abstract: Mandatory contributions to defined benefit pension plans provide a unique identification strategy to estimate the market's assessment of the value of internal resources controlling for investment opportunities. The price decrease following a pension-induced drop in cash is magnified for firms that appear a priori more financially constrained, suggesting a negative effect of financing frictions on investment. In contrast, low control on managerial discretion attenuates the negative price reaction to contributions consistent with empire-building theories. While overinvestment seems to be the prevalent distortion in a panel of large firms, underinvestment appears to dominate in a sample that is more representative of the cross-section of listed companies.

Keywords: Financial; constraints; Corporate; governance; Underinvestment; Overinvestment (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:92:y:2009:i:3:p:491-518

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