Pension Plan Funding and Stock Market Efficiency

By Francesco A. Franzoni, Jose M. Marin. 2006

212 citations recorded by the source corpus.

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.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/96edcb6de7cc221a833108b9facd5b6f67f14f8d

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Citations in the corpus

How Do Pensions Affect Corporate Capital Structure Decisions (2010, unknown): “Coronado and Sharpe (2003), and Franzoni and Marin (2006) show that the current level of plan underfunding is insufficient information for investors to understand the impact of pension plans for future earnings and cash flows.”
Does Academic Research Destroy Stock Return Predictability (2016, background): “As examples, Franzoni and Marin (2006) show that a pension funding variable predicts future stock returns.”
Underinvestment vs. overinvestment: Evidence from price reactions to pension contributions (2009, background): “In particular, the results in Coronado and Sharpe (2003) and Franzoni and Marin (2006a) reveal that the market is slow in impounding pension information into value.”