HOW CORPORATE PENSIONS AFFECT STOCK RETURNS: THE ROLE OF R&D EXPENDITURES

M. Kabir Hassan, M. Sydul Karim, Alberto Dreassi and Andrea Paltrinieri
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M. Sydul Karim: Kalamazoo College, Kalamazoo, USA
Alberto Dreassi: University of Trieste, Italy
Andrea Paltrinieri: Università Cattolica del Sacro Cuore, Italy

Journal of Financial Management, Markets and Institutions (JFMMI), 2023, vol. 11, issue 01, 1-30

Abstract: We examine the stock return implications of corporate-defined benefit pension plans in innovative U.S. firms and in R&D- and patent-sorted portfolio specifications. We find that investors underreact to firms increasing off-balance-sheet liabilities. Pensions represent material off-balance-sheet liabilities: in our extensive and large sample (1985–2017, 2541 firms for 26,522 observations), entities with pension plans are 38% more levered when we integrate pension liabilities and assets into the firms’ capital structure. We find that R&D-intensive firms increasing the size of their pension liability subsequently underperform their benchmark returns. Through six alternative R&D-market capitalization portfolios, we also find that this association is stronger for smaller firms. Finally, the relationship remains persistent over a long horizon. These findings are robust to endogeneity concerns addressed through instrumental variables, propensity score matching, and Heckman correction.

Keywords: Stock returns; R&D expenditures; D.B. pension schemes; leverage; off-balance sheet items (search for similar items in EconPapers)
JEL-codes: G23 G30 G32 H32 O33 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S2282717X23500020

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