Pension Plan Funding and Stock Market Efficiency

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.

• Publication year

  2006

• Venue

  Journal of Finance

• Publication date

  2006-04-01

• Fields of study

  Business, Economics

• Identifiers
  DOI 10.2139/SSRN.590683
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

• Earnings Quality and Stock Returns

  2006cited by this paper
• The Capital Asset Pricing Model : Some Empirical Tests 1

  2006cited by this paper
• Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans

  2006cited by this paper
• Earnings Manipulation, Pension Assumptions and Managerial Investment Decisions

  2006cited by this paper
• Idiosyncratic Risk and Security Returns

  2004cited by this paper
• Did Pension Plan Accounting Contribute to a Stock Market Bubble?

  2003cited by this paper
• Underfunding of private pension plans

  2003cited by this paper
• Momentum and Autocorrelation in Stock Returns

  2002cited by this paper
• Idiosyncratic Risk and Security Returns ∗

  2002cited by this paper
• Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies

  2000cited by this paper
• Can Book-to-Market, Size, and Momentum Be Risk Factors That Predict Economic Growth?

  2000cited by this paper
• Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings

  1998cited by this paper
• Is the Risk of Bankruptcy a Systematic Risk

  1998cited by this paper
• Pension Plan Funding and Corporate Debt Ratings

  1998cited by this paper
• Risk and Return Revisited

  1997cited by this paper
• Multifactor Explanations of Asset Pricing Anomalies

  1996cited by this paper
• Momentum Strategies

  1996cited by this paper
• Size and Book-to-Market Factors in Earnings and Returns

  1995cited by this paper
• A Critique of Size-Related Anomalies

  1995cited by this paper
• Contrarian Investment, Extrapolation, and Risk

  1994cited by this paper
• Common risk factors in the returns on stocks and bonds

  1993influential reference
• Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency

  1993influential reference
• Structural and Return Characteristics of Small and Large Firms

  1991cited by this paper
• Evidence that stock prices do not fully reflect the implications of current earnings for future earnings

  1990cited by this paper
• A Test of the Efficiency of a Given Portfolio

  1989cited by this paper
• Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior

  1989cited by this paper
• Sample‐Dependent Results Using Accounting and Market Data: Some Evidence

  1986cited by this paper
• How Does the Market Value Unfunded Pension Liabilities

  1985influential reference
• Pension Funding Decisions, Interest Rate Assumptions and Share Prices

  1982cited by this paper
• Pension Funding Decisions, Interest Rate Assumptions and Share Prices

  1982cited by this paper
• Pension Funding, Share Prices, and National Saving

  1981cited by this paper
• FINANCIAL RATIOS AND THE PROBABILISTIC PREDICTION OF BANKRUPTCY

  1980cited by this paper
• AN INTERTEMPORAL CAPITAL ASSET PRICING MODEL

  1973cited by this paper
• Risk, Return, and Equilibrium: Empirical Tests

  1973cited by this paper
• An empirical evaluation of accounting income numbers

  1968cited by this paper

• Decoding Annual Report Narrative Disclosure Readability: Pension Plan Characteristics Perspective

  2026cites this paper
• Asymmetric Shocks and Pension Fund Volatility: A GARCH Approach with Macroeconomic Predictors to an Unexplored Emerging Market

  2025cites this paper
• Do analysts underreact to pension underfunding? Evidence from forecast bias and funding ratios of DB plans in Korea

  2025cites this paper
• Corporate Pension Risk Transfers

  2025cites this paper
• Why Settle for the Status Quo? A Critical Assessment of Pension Liability Measurement Under IFRS and US GAAP

  2025cites this paper
• Recognition Versus Disclosure and Managerial Discretion: Evidence From Japanese Pension Accounting

  2025cites this paper
• Pension funding gaps: do mandated external governance mechanisms matter?

  2024cites this paper
• Institutional trading, news, and accounting anomalies

  2024cites this paper
• Mitigating Risk-Shifting in Corporate Pension Plans: Evidence from Stakeholder Constituency Statutes

  2024cites this paper
• Non-operating risk and cash holdings: Evidence from pension risk

  2023cites this paper
• Does Recognition versus Disclosure of Pension Liabilities Affect Credit Ratings? Evidence from Japan

  2023cites this paper
• Can unexpected pension contributions improve employee productivity? Evidence from the Tax Cuts and Jobs Act of 2017

  2023cites this paper
• Risk‐taking in pension and crashes: Firm‐level evidence

  2023cites this paper
• Pension funding and the cross section of stock returns - the case of Germany

  2023cites this paper
• Optimal management of DB pension fund under both underfunded and overfunded cases

  2023cites this paper
• Initial Evidence on the Association Between Audit Fees and Client Participation in Underfunded Multiemployer Pension Plans

  2023cites this paper
• Do Managers Change Pension Plan Assumptions to Meet/Exceed Earnings Threshold? Korean Evidence

  2023cites this paper
• Pension accounting information and firm value: An analysis of FTSE 100 companies.

  2023cites this paper
• Pension plans’ funded status volatility and corporate credit risk

  2022influential citation
• COST OF EQUITY CAPITAL AND UNDERSTATED

  2022cites this paper
• Effect of household's financial literacy on pension decision making: evidence from China's new rural pension program

  2022cites this paper
• The association between public pension fund characteristics and pension accounting choices

  2022cites this paper
• Shareholder response to pension deficit: evidence from the COVID-19 pandemic

  2022influential citation
• Multiemployer Defined Benefit Pension Plans: Employer Withdrawals and Financial Vulnerability

  2022cites this paper
• Discounting and the market valuation of defined benefit pensions

  2021cites this paper
• Corporate risk management and pension investment policy

  2021cites this paper
• Open Source Cross-Sectional Asset Pricing

  2021influential citation
• Pension Accounting, Inside Debt, and Capital Structure

  2021cites this paper
• Corporate bond spreads and understated pension liabilities

  2021cites this paper
• What determines the asset allocation of defined benefit pension funds?

  2021cites this paper
• Pension return assumptions and shareholder-employee risk-shifting

  2021cites this paper
• Value relevance of excess return on pension assets and pension OCI components

  2021cites this paper
• Downside Risk and the Performance of Volatility-Managed Portfolios

  2021cites this paper
• Capital structure choices, pension fund allocation decisions and the rational pricing of liability streams

  2021cites this paper
• Disclosure versus recognition: the value relevance of pensions

  2021cites this paper
• Is housing still the business cycle? Perhaps not

  2021cites this paper
• The cost-of-equity implications of off-balance sheet pension liabilities

  2021cites this paper
• Replicating Anomalies

  2020cites this paper
• Pension Overhang and Corporate Investment

  2020cites this paper
• Compliance with pension‐related mandatory disclosures and debt financing

  2020cites this paper
• Anomalies across the globe: Once public, no longer existent?

  2020cites this paper
• Board Co-option and the Defined-Benefit Pension Policy

  2020cites this paper
• The Economic Consequences of GASB Financial Statement Disclosure

  2020cites this paper
• Cost saving and the freezing of corporate pension plans

  2020cites this paper
• Cost Saving and the Freezing of Corporate Pension Plans

  2020cites this paper
• The Effects of the Tax Cuts and Jobs Act of 2017 on Defined Benefit Pension Contributions*

  2020cites this paper
• The correlation structure of anomaly strategies

  2020cites this paper
• Pension Funding Regulations and Actuarial Gains and Losses

  2020cites this paper
• Financial health and the valuation of corporate pension plans

  2020cites this paper
• Pension plan funding and market value of the firm: the Portuguese case

  2020cites this paper
• The effect of SFAS 158 on the mispricing of pension plan funding

  2020influential citation
• Pension Plan Characteristics and Narrative Disclosure Readability in Annual Reports.

  2020influential citation
• On the performance of volatility-managed portfolios

  2020cites this paper
• The determinants and consequences of finance committee use

  2019cites this paper
• Does pension plan reporting readability affect earnings volatility?

  2019cites this paper
• What's good for you is good for me: The effect of CEO inside debt on the cost of equity

  2019cites this paper
• A Study of Cross Sectional Stock Returns Using High-Dimensional SUR Model and Many Firm Level Characteristics

  2019cites this paper
• Impact of Pension Plan Risk on Cost of Debt and Equity in Companies with Pension Plan Assets

  2019influential citation
• Corporate Pensions and the Maturity Structure of Debt

  2019cites this paper
• Assessing the effects of unconventional monetary policy on pension funds risk incentives

  2019cites this paper
• Influence of Financial Management Practices on Sustainability of Pension Funds Administrative Institutions in Kenya

  2019cites this paper
• Does Recognition versus Disclosure Affect Debt Contract Design? Evidence from SFAS 158

  2019cites this paper
• The Effects of Pension Overhang on Corporate Policies

  2019cites this paper
• The effect of audit quality on the pension risk – cost of equity relation

  2019cites this paper
• Corporate Pension Plan Funding Levels and Pension Assumptions

  2019cites this paper
• The Usefulness of Selective Tax Return Disclosure: Evidence from Form 5500

  2019cites this paper
• Pension discount rate and investor sentiment

  2019cites this paper
• Pension risk and corporate investment distortion

  2018cites this paper
• The strategic use of pensions by not-for-profit organizations

  2018cites this paper
• A Termination Rule for Pension Guarantee Funds

  2018cites this paper
• Day of the week and the cross-section of returns

  2018cites this paper
• Golden Handcuffs and Corporate Innovation: Evidence from Defined Benefit Pension Plans

  2018cites this paper
• Assessment of the Technological Changes Impact on the Sustainability of State Security System of Ukraine

  2018cites this paper
• Pension Deficits and the Design of Private Debt Contracts

  2018influential citation
• Underfunding or distress? An analysis of corporate pension underfunding and the cross-section of expected stock returns

  2017cites this paper
• Are managers paid for better levels of pension funding

  2017cites this paper
• Do corporate pension plans affect audit pricing

  2017cites this paper
• Do Managers of U.S. Defined Benefit Pension Plan Sponsors Use Regulatory Freedom Strategically?: PENSION PLANS AND REGULATORY FREEDOM

  2017cites this paper
• Does Employee Inside Debt Discipline Managers in the Market for Corporate Control? Evidence from Corporate Pension Deficits

  2017cites this paper
• Cash Flow Volatility - Return Relation and Financial Constraints: International Evidence

  2017cites this paper
• A Comparison of New Factor Models

  2017cites this paper
• Pension accruals and share prices: evidence from the amortization costs of transition amounts*

  2017influential citation
• Pension accrual management and research and development investment

  2017cites this paper
• Tax avoidance in response to a decline in the funding status of defined benefit pension plans

  2017cites this paper
• Essays on Pension De-risking Strategies

  2017cites this paper
• Pension beta or funding shortfall ? Analyzing the effect of pension fund risk on the cost of debt

  2017influential citation
• Alternative measurement bases in pension accounting: a simulation analysis

  2017cites this paper
• Defined benefit plan retentions and pension buy-ins/buy-outs: Evidence from the UK.

  2017cites this paper
• Standards or Incentives: What Determines Financial Reporting Transparency for Defined Benefit Pension Assets?

  2017cites this paper
• Financial Implications of Discretionary Retirement Benefits: Evidence from India Abstract Discretionary retirement expenses borne by firms form an important component of the total employee compensation. Such employee-welfare expenses improve corporate reputation and increase organizational commitmen

  2017cites this paper
• Corporate Finance and Pension Schemes

  2016cites this paper
• Does Academic Research Destroy Stock Return Predictability

  2016cites this paper
• Employee Benefit Plans and Loan Contracts

  2016influential citation
• Excess of the PBO over the ABO and hard pension freezes

  2016cites this paper
• An Empirical Analysis of State and Local Public Pension Plan Funded Ratio Change, 2001-2009

  2016cites this paper
• Do Investors Misprice Components of Net Periodic Pension Cost

  2016cites this paper
• Pension plans: risk and governance

  2016influential citation
• The Integrity of Financial Analysts: Evidence from Asymmetric Responses to Earnings Surprises

  2016cites this paper
• The Information Content of Corporate Pension Funding Status in Japan

  2016cites this paper
• When Principals Conflict: Stakeholder Power, Executive Decision-Making, and the Manipulation of Pension Assumptions

  2016cites this paper