Optimal risk-taking in corporate defined benefit plans under risk-shifting
Tomoki Kitamura and
Managerial Finance, 2019, vol. 45, issue 8, 1076-1091
Purpose - The purpose of this paper is to theoretically examine the risk-taking decision of corporate defined benefits (DB) plans. The equity holders’ investment problem that is represented by the position of a vulnerable option is solved. Design/methodology/approach - The simple traditional contingent claim approach is applied, which considers only the distributions of corporate cash flow, without the model expansions, such as market imperfections, needed to explain the firms’ behavior for DB plans in previous studies. Findings - The authors find that the optimal solution to the equity holders’ DB investment problem is not an extreme corner solution such as 100 percent investment in equity funds as in the literature. Rather, the solution lies in the middle range, as is commonly observed in real-world economies. Originality/value - The major value of this study is that it develops a clear mechanism for obtaining an internal solution for the equity holders’ DB investment problem and it provides the understanding that the base for corporate investment behavior for DB plans should incorporate the fact that in some cases the optimal solution is in the middle range. Therefore, the corporate risk-taking behavior of DB plans is harder to identify than the results of the empirical literature have predicted.
Keywords: Risk-taking; Corporate defined benefit (DB) pension plans; Optimal portfolio selection; Risk-shifting; Vulnerable option (search for similar items in EconPapers)
References: Add references at CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://www.emeraldinsight.com/10.1108/MF-01-2019-0 ... RePEc&WT.mc_id=RePEc (text/html)
Access to full text is restricted to subscribers
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eme:mfipps:mf-01-2019-0016
Ordering information: This journal article can be ordered from
Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
http://emeraldgroupp ... s/journals.htm?id=mf
Access Statistics for this article
Managerial Finance is currently edited by Professor Don T Johnson
More articles in Managerial Finance from Emerald Group Publishing
Bibliographic data for series maintained by Virginia Chapman ().