Pension plan funding and stock market efficiency

Francesco Franzoni and Jose Marin ()

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: The paper argues that the market signifficantly 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: Pricing anomalies; DB plans; market efficiency (search for similar items in EconPapers)
JEL-codes: G12 G14 G23 J26 M41 (search for similar items in EconPapers)
Date: 2005-06
New Economics Papers: this item is included in nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Pension Plan Funding and Stock Market Efficiency (2006)
Working Paper: Pension Plan Funding and Stock Market Efficiency (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:871

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