Access the full text.
Sign up today, get DeepDyve free for 14 days.
Emphasizes the fact that most of the risk in a defined benefit plan's pension fund portfolio is borne by the stockholders of the sponsoring firm
Points out that, ignoring tax factors, a firm's stock-holders may not care how the pension fund investments are divided between bonds and stocks
Masulis Masulis
The Effects of Capital Structure Change on Security Prices: A Study of Exchange OffersJournal of Financial Economics
Tepper Tepper, Paul Paul (NovemberDecember 1978)
How Much Funding for Your Company's Pension PlanHarvard Business Review
Black Black (JanuaryFebruary 1976)
The Investment Policy SpectrumFinancial Analysts Journal
Treynor Treynor, Regan Regan, William William (MayJune 1978)
Pension Claims and Corporate AssetsFinancial Analysts Journal
Sharpe Sharpe (June 1976)
Corporate Pension Funding PolicyJournal of Financial Economics
Journal of Financial Economics, forthcoming. Finds that, when firms offer to exchange debt for stock, the stock price goes up an average of 10 percent on announcement of the offer
A firm's pension fund is legally separate from the firm. But because pension benefits are normally independent of fund performance, pension assets impact the firm very much as if they were firm assets. Because they are worth more when times are good and less when times are bad, common stocks in the pension fund add to the sponsoring firm's leverage. They cause contributions to a pension fund to be high just when the firm can least afford to pay them. Conversely, bonds in the pension fund will make it easier for the firm to avoid default on its own bonds when times are bad all over: The more bonds a pension fund buys, the more the firm can borrow. The tax treatment accorded the pension fund differs notably from that accorded the firm. Some have argued that a firm can capitalize on the difference by accelerating the funding of its pension plan. The benefits of full funding are wasted, however, unless the added contributions to the fund are invested in bonds; higher pension contributions now mean lower contributions later, hence higher taxes later. The benefits come from earning, after taxes, the pretax interest rate on the bonds in the pension fund. If the firm wants to take advantage of the differing tax treatment of bonds without altering the level of its current pension contributions, it can (1) sell stocks in the pension fund and then buy bonds with the proceeds while (2) issuing debt in the firm and buying back its own shares with the proceeds. An investment in the firm's own stock creates no more tax liability than an investment in stocks through the pension fund.
Journal of Applied Corporate Finance – Wiley
Published: Mar 1, 2006
Read and print from thousands of top scholarly journals.
Already have an account? Log in
Bookmark this article. You can see your Bookmarks on your DeepDyve Library.
To save an article, log in first, or sign up for a DeepDyve account if you don’t already have one.
Copy and paste the desired citation format or use the link below to download a file formatted for EndNote
Access the full text.
Sign up today, get DeepDyve free for 14 days.
All DeepDyve websites use cookies to improve your online experience. They were placed on your computer when you launched this website. You can change your cookie settings through your browser.