Underfunding or distress? An analysis of corporate pension underfunding and the cross-section of expected stock returns

Qizhi Tao, Carl Chen, Rui Lu and Ting Zhang

International Review of Economics & Finance, 2017, vol. 48, issue C, 116-133

Abstract: The pension underfunding anomaly (Franzoni & Marín, 2006) is mainly concentrated in financially distressed sponsors. The predictability of pension underfunding levels on the cross-sectional stock returns disappears after considering sponsor financial distress. It exists when underfunding is primarily due to poor operating performance and during the initial five years of underfunding; it diminishes when underfunding is due to bad pension investment returns and when firms underfund for more than five years. The potential financial distress inherent in the most underfunded firms and the prospect of intervention by the Pension Benefit Guaranty Corporation make the arbitrage opportunity not entirely risk free.

Keywords: Financial distress; Pension underfunding; Cross-section of stock returns; Expected default frequency (search for similar items in EconPapers)
JEL-codes: G12 G14 G33 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:48:y:2017:i:c:p:116-133

DOI: 10.1016/j.iref.2016.11.009

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