Pension Plan Funding and Stock Market Efficiency

Francesco Franzoni () and Jose Marin ()
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Francesco Franzoni: GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique

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Abstract: The paper argues that the market significantly overvalues firms with severely underfunded pension plans. These companies earn lower stock returns than firms with healthier pension plans for at least five years after the first emergence of the underfunding. The low returns are not explained by risk, price momentum, earnings momentum, or accruals. Further, the evidence suggests that investors do not anticipate the impact of the pension liability on future earnings, and they are surprised when the negative implications of underfunding ultimately materialize. Finally, underfunded firms have poor operating performance, and they earn low returns, although they are value companies

Keywords: MOMENTUM STRATEGIES; FINANCIAL RATIOS; CAPITAL-MARKETS; FUTURE EARNINGS; FULLY REFLECT; RISK; RETURNS; BANKRUPTCY; PRICES; PREDICTION (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (63)

Published in Journal of Finance, 2006, 61 (2), pp.921-956

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00009850

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