NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Funding and Asset Allocation in Corporate Pension Plans: An Empirical Investigation

Zvi Bodie, Jay O. Light, Randall Morck, Robert A. Taggart, Jr.

NBER Working Paper No. 1315 (Also Reprint No. r0727)
Issued in July 1986

This paper contrasts and empirically tests two different views of corporate pension policy: the traditional view that pension funds are managed without regard to either corporate financial policy or the interests of the corporation and its shareholders, and the corporate financial perspective represented by the recent theoretical work of Black (1980), Sharpe (1916),Tepper (1981), and Treynor (1971), which stresses the potential effects of a firm's financial condition on its pension funding and asset allocation decisions. We find several pieces of evidence supporting the corporate financial perspective. First, we find that there is a significant inverse relationship between firms' profitability and the discount rates they choose tor eport their pension liabilities. In view of this we adjust all reported pension liabilities to a common discount rate assumption. We then find a significant positive relationship between firm profitability and the degree ofpension funding, as is consistent with the corporate financial perspective. We also find some evidence that firms facing higher risk and lower tax liabilities are less inclined to fully fund their pension plans. On the asset allocation question, we find that the distribution of plan assets invested in bonds is bi-modal, but that it does not tend to cluster around extreme portfolio configurations to the extent predicted by the corporate financial perspective. We also find that the percentage of plan assets invested in bonds in negatively related to both total size of plan and the proportion of unfunded liabilities.The latter relationship shows up particularly among the riskiest firms and is consistent with the corporate financial perspective on pension decisions.

download in pdf format
   (559 K)

email paper

This paper is available as PDF (559 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w1315

Published:

Users who downloaded this paper also downloaded these:
Bodie, Light, and Morck Funding and Asset Allocation in Corporate Pension Plans: An Empirical Investigation
Harrison and Sharpe w0935 Optimal Funding and Asset Allocation Rules for Defined-Benefit Pension Plans
Bodie w3101 Pension Funds and Financial Innovation
Harrison and Sharpe Optimal Funding and Asset Allocation Rules for Defined-Benefit Pension Plans
Bodie w2752 Pension Fund Investment Policy
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us