Introduction
Literature Review and Hypothesis Development
Corporate Pension Plans
Stakeholder Conflicts and Risk Shifting in Corporate Pension Plans
EPU, Financial Distress Risk, and Pension Underfunding
Manager–Employee Conflict
Shareholder–Employee Conflict
Institutional Disciplining Mechanisms: Union, Social Capital, and Corporate Culture
Methodology
Sample and Research Design
Descriptive Statistics
Variable | Observations | Mean | SD | Min | 25th Percentile | 50th Percentile | 75th Percentile | 90th Percentile | Max |
---|---|---|---|---|---|---|---|---|---|
UNDERFUND | 13,200 | 0.3449 | 0.5398 | − 1.655 | 0.0569 | 0.2095 | 0.515 | 1.0122 | 2.1483 |
EPU | 13,200 | 4.7373 | 0.3005 | 4.2673 | 4.4788 | 4.7136 | 4.9464 | 5.123 | 5.493 |
CASH | 13,200 | 0.0855 | 0.0843 | 0 | 0.0236 | 0.0601 | 0.1195 | 0.1962 | 0.8579 |
EARNVOL | 13,200 | 1.5494 | 2.5956 | 0.0163 | 0.4106 | 0.775 | 1.5786 | 3.2373 | 19.4979 |
LEVERAGE | 13,200 | 0.2801 | 0.2034 | 0 | 0.1458 | 0.2571 | 0.3762 | 0.5228 | 2.4387 |
PPE | 13,200 | 0.286 | 0.1936 | 0.0017 | 0.1371 | 0.2381 | 0.3876 | 0.5763 | 0.9194 |
Z_SCORE | 13,200 | 1.7722 | 1.1789 | − 2.459 | 1.121 | 1.8139 | 2.4836 | 3.1157 | 4.9578 |
MTB | 13,200 | 1.4173 | 1.1401 | 0.2356 | 0.8161 | 1.1424 | 1.6734 | 2.457 | 41.7242 |
ROA | 13,200 | 0.0328 | 0.1592 | − 12.95 | 0.0114 | 0.0461 | 0.0798 | 0.1183 | 0.3974 |
FIRM SIZE | 13,200 | 7.5338 | 1.6917 | − 0.949 | 6.4462 | 7.6025 | 8.7271 | 9.8651 | 10.3326 |
RET_PENSON | 13,200 | 0.0631 | 0.106 | − 0.281 | 0.0072 | 0.0837 | 0.1294 | 0.1752 | 0.2997 |
LEV_LONG | 13,200 | 0.641 | 1.4385 | 0 | 0.0905 | 0.2285 | 0.5203 | 1.27 | 9.8192 |
NEG_EQUITY | 13,200 | 0.0633 | 0.2435 | 0 | 0 | 0 | 0 | 0 | 1 |
SALES_GROWTH | 13,200 | 0.0505 | 0.2362 | − 1 | − 0.0344 | 0.0405 | 0.1155 | 0.2264 | 9.2515 |
INSTOWNERSHIP | 13,200 | 0.6744 | 0.2593 | 0.0002 | 0.5267 | 0.734 | 0.8722 | 0.953 | 1.0671 |
MARKET_CAP | 13,200 | 7.2506 | 2.0309 | − 1.036 | 5.9991 | 7.3547 | 8.6729 | 9.9656 | 10.5902 |
(1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | (9) | (10) | (11) | (12) | (13) | (14) | (15) | (16) | |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
UNDER_ FUND | 1 | |||||||||||||||
EPU | 0.122*** | 1 | ||||||||||||||
CASH | 0.068*** | 0.114*** | 1 | |||||||||||||
EARNVOL | 0.078*** | 0.061*** | − 0.023** | 1 | ||||||||||||
LEVERAGE | 0.027** | 0.056*** | − 0.226*** | 0.106*** | 1 | |||||||||||
PPE | − 0.041*** | − 0.040*** | − 0.227*** | 0.080*** | 0.129*** | 1 | ||||||||||
Z_SCORE | − 0.124*** | − 0.044*** | − 0.015 | − 0.050*** | − 0.245*** | − 0.024** | 1 | |||||||||
MTB | − 0.055*** | − 0.031*** | 0.216*** | − 0.151*** | 0.0285** | − 0.123*** | − 0.240*** | 1 | ||||||||
ROA | − 0.115*** | − 0.045*** | 0.047*** | − 0.079*** | − 0.126*** | − 0.034*** | 0.745*** | − 0.058*** | 1 | |||||||
FIRM SIZE | − 0.119*** | 0.106*** | − 0.115*** | 0.097*** | 0.105*** | 0.038*** | 0.098*** | 0.050*** | 0.170*** | 1 | ||||||
RET _PENSON | − 0.067*** | − 0.047*** | 0.026** | 0.038*** | 0.005 | 0.010 | 0.034*** | 0.055*** | 0.085*** | 0.090*** | 1 | |||||
LEV_LONG | 0.080*** | 0.037*** | − 0.156*** | 0.231*** | 0.448*** | 0.134*** | − 0.133*** | − 0.203*** | − 0.211*** | − 0.042*** | − 0.077*** | 1 | ||||
NEG _EQUITY | 0.216*** | 0.012 | 0.006 | 0.153*** | 0.425*** | 0.023** | − 0.222*** | 0.033*** | − 0.203*** | − 0.080*** | − 0.021* | 0.391*** | 1 | |||
SALES _GROWTH | − 0.065*** | − 0.123*** | − 0.049*** | − 0.059*** | − 0.024** | − 0.011 | 0.039*** | 0.075*** | 0.125*** | 0.027** | 0.032*** | − 0.069*** | − 0.066*** | 1 | ||
INST _OWNERSHIP | − 0.058*** | 0.074*** | 0.068*** | − 0.027** | − 0.037*** | − 0.114*** | 0.087*** | 0.068*** | 0.105*** | 0.422*** | 0.046*** | − 0.154*** | − 0.158*** | 0.021* | 1 | |
MARKET _CAP | − 0.161*** | 0.067*** | 0.003 | − 0.066*** | − 0.051*** | − 0.049*** | 0.117*** | 0.295*** | 0.234*** | 0.891*** | 0.060*** | − 0.295*** | − 0.191*** | 0.04*** | 0.46*** | 1 |
Empirical Results
Baseline
(1) | (2) | (3) | (4) | (5) | (6) | (7) | |
---|---|---|---|---|---|---|---|
EPU | 0.367*** | 0.323*** | 0.236*** | ||||
(16.11) | (15.11) | (9.53) | |||||
EPU_NEWS | 0.184*** | ||||||
(8.35) | |||||||
EPU_GOV_DIS | − 0.013 | ||||||
(− 0.92) | |||||||
EPU_CPI | − 0.019 | ||||||
(− 0.85) | |||||||
EPU_TAX | 0.039*** | ||||||
(10.48) | |||||||
CASH | 0.309*** | 0.147 | 0.161* | 0.226** | 0.222** | 0.164* | |
(3.08) | (1.54) | (1.67) | (2.32) | (2.27) | (1.72) | ||
EARNVOL | 0.007 | 0.006 | 0.006 | 0.008* | 0.008* | 0.006 | |
(1.62) | (1.34) | (1.52) | (1.77) | (1.76) | (1.28) | ||
LEVERAGE | − 0.082 | − 0.010 | − 0.039 | 0.008 | 0.006 | 0.060 | |
(− 1.34) | (− 0.18) | (− 0.66) | (0.14) | (0.10) | (1.01) | ||
PPE | − 0.397*** | − 0.267** | − 0.291** | − 0.265** | − 0.267** | − 0.195 | |
(− 3.08) | (− 2.21) | (− 2.38) | (− 2.16) | (− 2.17) | (− 1.62) | ||
Z_SCORE | − 0.008 | − 0.005 | − 0.006 | − 0.008 | − 0.008 | − 0.006 | |
(− 1.03) | (− 0.73) | (− 0.73) | (− 1.01) | (− 1.00) | (− 0.82) | ||
MTB | − 0.004 | 0.005 | 0.003 | 0.004 | 0.004 | 0.009 | |
(− 0.43) | (0.79) | (0.46) | (0.64) | (0.63) | (1.33) | ||
ROA | − 0.038 | − 0.035 | − 0.028 | − 0.014 | − 0.014 | − 0.035 | |
(− 0.39) | (− 0.43) | (− 0.34) | (− 0.17) | (− 0.17) | (− 0.41) | ||
FIRMSIZE | − 0.036 | − 0.039* | − 0.039* | − 0.010 | − 0.011 | − 0.025 | |
(− 1.51) | (− 1.70) | (− 1.72) | (− 0.44) | (− 0.48) | (− 1.10) | ||
RET_PENSON | − 0.358*** | − 0.478*** | − 0.414*** | − 0.399*** | − 0.405*** | − 0.512*** | |
(− 12.35) | (− 13.50) | (− 12.22) | (− 12.22) | (− 11.99) | (− 14.53) | ||
LEV_LONG | 0.003 | 0.002 | 0.02 | 0.001 | 0.001 | 0.001 | |
(0.31) | (0.19) | (0.17) | (0.13) | (0.13) | (0.11) | ||
NEG_EQUITY | 0.179*** | 0.141*** | 0.145*** | 0.151*** | 0.151*** | 0.129*** | |
(5.18) | (4.30) | (4.42) | (4.48) | (4.50) | (3.82) | ||
SALES_GROWTH | − 0.000 | 0.026** | 0.034*** | 0.030*** | 0.032*** | 0.018 | |
(− 0.00) | (2.26) | (2.89) | (2.63) | (2.72) | (1.63) | ||
INSTOWNERSHIP | 0.238*** | 0.127** | 0.140*** | 0.102** | 0.104** | 0.062 | |
(4.35) | (2.46) | (2.64) | (1.97) | (2.00) | (1.24) | ||
MARKET CAP | − 0.064*** | − 0.065*** | − 0.067*** | − 0.065*** | − 0.066*** | − 0.064*** | |
(− 3.69) | (− 3.93) | (− 4.05) | (− 3.88) | (− 3.87) | (− 3.86) | ||
MACRO_UNCERTAINTY | 0.110*** | 0.110*** | 0.088*** | 0.087*** | 0.080*** | ||
(First Principal Component) | (14.18) | (13.68) | (13.13) | (13.32) | (12.35) | ||
INVEST_OPP | − 0.110*** | − 0.123*** | − 0.137*** | − 0.136*** | − 0.107*** | ||
(First Principal Component) | (− 17.14) | (− 18.26) | (− 17.95) | (− 18.61) | (− 18.81) | ||
CONSTANT | − 1.377*** | − 0.464*** | − 0.034 | 0.214 | 0.918*** | 0.956*** | 0.769*** |
(− 12.88) | (− 2.66) | (− 0.20) | (1.33) | (5.53) | (4.86) | (5.05) | |
Adj.R2 | 0.063 | 0.118 | 0.178 | 0.178 | 0.166 | 0.166 | 0.179 |
Robustness Tests
Controlling for Discount Rates, Plan Sizes, and Local Economy
(1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | (9) | |
---|---|---|---|---|---|---|---|---|---|
UNDERFUND (t + 1) | UNDERFUND (t + 1) | UNDERFUND (t + 1) | UNDERFUND (t + 1) | UNDERFUND_PPA (t + 1) | UNDERFUND_80pct (t + 1) | UNDERFUND (t + 1) | FREEZE (t + 1) (Probit) | FREEZE(t + 1) (OLS) | |
EPU | 0.2659*** | 0.2032*** | 0.1455*** | 0.1452*** | 0.1399*** | 0.1055*** | 0.1898*** | 0.9688*** | 0.1609*** |
(15.15) | (7.44) | (6.10) | (6.09) | (8.99) | (4.71) | (8.07) | (10.53) | (8.46) | |
UNDERFUND | 0.0619 | 0.0688*** | |||||||
(0.83) | (4.20) | ||||||||
DISCOUNT RATE | − 0.0597*** | ||||||||
(− 7.11) | |||||||||
ASSET_PENSION | − 0.430*** | − 0.428*** | |||||||
(− 8.40) | (− 8.34) | ||||||||
LIABILITY_PENSION | 0.6353*** | 0.6348*** | |||||||
(10.93) | (10.90) | ||||||||
NO. EMPLOYEES | − 0.0009 | ||||||||
(− 1.59) | |||||||||
STATE_GDP | − 0.0243*** | − 0.0197*** | − 0.0194*** | ||||||
(− 11.64) | (− 10.62) | (− 10.49) | |||||||
STATE_UNEMPLOY | 0.0107*** | 0.0053 | 0.0051 | ||||||
(2.67) | (1.49) | (1.44) | |||||||
Firm and Macroeconomic | YES | YES | YES | YES | YES | YES | YES | YES | YES |
Firm fixed effects | YES | YES | YES | YES | YES | YES | YES | NO | YES |
N | 12,735 | 13,151 | 13,151 | 13,086 | 13,210 | 13,210 | 9447 | 11,437 | 11,437 |
Adj. R2 | 0.130 | 0.195 | 0.283 | 0.282 | 0.137 | 0.095 | 0.176 | 0.0341 | 0.061 |
Regulatory-motivated Thresholds and Pension Freezes
Difference-in-Difference and 2SLS Estimation
Panel A | EPU (t + 1) |
---|---|
UNDERFUND | 0.1867 |
(0.96) | |
MACRO_UNCERTAINTY | − 0.1733 |
(First Principal Component) | (− 1.35) |
INVEST_OPP | 0.0516 |
(First Principal Component) | (0.34) |
CONSTANT | 4.5977*** |
(34.95) | |
Year cluster | YES |
N | 23 |
adj. R2 | 0.118 |
Panel B | (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | (9) |
---|---|---|---|---|---|---|---|---|---|
Difference-in-Difference | Instrument Variable 2SLS | ||||||||
Stage 1 | Stage 2 | Stage 1 | Stage 2 | Stage 1 | Stage 2 | ||||
UNDERFUND (t + 1) | UNDERFUND (t + 1) | UNDERFUND (t + 1) | EPU | UNDERFUND (t + 1) | EPU | UNDERFUND (t + 1) | EPU | UNDERFUND (t + 1) | |
GUBER_ELECT | 0.0106** | ||||||||
(2.08) | |||||||||
PC5%_MARGIN | 0.0258** | ||||||||
(1.98) | |||||||||
NOINCUM | 0.0140** | ||||||||
(2.11) | |||||||||
EPU_HAT | 1.9048*** | 0.3201*** | 2.0527** | ||||||
(Instrumented) | (16.79) | (3.48) | (2.11) | ||||||
POLAR | 0.8123*** | ||||||||
(22.68) | |||||||||
PCT5%_MARGIN | 2.4012*** | ||||||||
(20.91) | |||||||||
PCT_NOINCUM | 0.2223*** | ||||||||
(2.69) | |||||||||
Under-identification test: Anderson canon. corr. LM Wald F-statistic | 493.779*** | 422.285*** | 7.255*** | ||||||
Weak identification test: Cragg-Donald Wald F-statistic | 514.541*** | 437.284*** | 7.249*** | ||||||
Firm and Macroeconomic | YES | YES | YES | YES | YES | YES | YES | YES | YES |
N | 13,169 | 13,169 | 13,169 | 13,077 | 13,077 | 13,077 | 13,077 | 13,038 | 13,038 |
Adj. R2 | 0.166 | 0.165 | 0.166 | 0.5269 | 0.2004 | 0.5239 | 0.1767 | 0.5067 | 0.1662 |
Further Evidence of Risk-Shifting in Pensions
Variables | (1) | (2) | (3) |
---|---|---|---|
CASH CONTRIBUTION (t + 1) | EQUITY ALLOCATION (t + 1) | PENSION BETA (t + 1) | |
EPU × UNDERFUND_HIGH | − 0.0593** | 0.0582*** | 0.0447*** |
(− 2.15) | (4.07) | (3.30) | |
UNDERFUND_HIGH | 0.2024 | − 0.2506*** | − 0.1887*** |
(1.62) | (− 3.69) | (− 2.92) | |
EPU | − 0.0124 | − 0.0173* | − 0.0131 |
(− 0.59) | (− 1.78) | (− 1.38) | |
MANDAT_CONTRI_HIGH | 0.0503** | 0.0143*** | 0.0187*** |
(2.13) | (2.60) | (3.58) | |
Firm and Macroeconomic controls | YES | YES | YES |
N | 8396 | 7913 | 7563 |
Adjusted R2 | 0.070 | 0.256 | 0.120 |
Cross-Sectional Analysis
Manager–Employee Conflict
Shareholder-Employee Conflict
Variables | (1) | (2) | (3) | (4) |
---|---|---|---|---|
CEO Total Compensation | CEO Compensation Based on Operating Cash Flow | Dividend | Institutional Investor Horizon | |
UNDERFUND (t + 1) | UNDERFUND (t + 1) | UNDERFUND (t + 1) | UNDERFUND (t + 1) | |
EPU_HIGH | 0.0992*** | 0.0550*** | 0.0698*** | 0.0629*** |
(7.72) | (3.11) | (6.71) | (4.62) | |
EPU_HIGH × CEO_PAY_HIGH | 0.0644** | |||
(1.98) | ||||
EPU_HIGH × CASHMATRIC | 0.1102* | |||
(1.71) | ||||
EPU_HIGH × DIVIDEND_HIGH | 0.1123*** | |||
(4.52) | ||||
EPU_HIGH × SHORT_TERM | 0.0342** | |||
(2.28) | ||||
CEO_PAY_HIGH | − 0.3207** | |||
(− 2.07) | ||||
CASHMETRIC | 0.0959* | |||
(1.68) | ||||
DIVIDEND_HIGH | − 0.5700*** | |||
(− 4.84) | ||||
SHORT_TERM | − 0.0047 | |||
(− 0.40) | ||||
Firm and Macroeconomic controls | YES | YES | YES | YES |
N | 9192 | 3598 | 12,634 | 11,743 |
Adj. R2 | 0.221 | 0.146 | 0.191 | 0.135 |
Disciplining Mechanisms
Variables | (1) | (2) | (3) |
---|---|---|---|
Union | Social Capital | Corporate Culture | |
UNDERFUND (t + 1) | UNDERFUND (t + 1) | UNDERFUND (t + 1) | |
EPU_HIGH | 0.3382*** | 0.1570*** | 0.0587*** |
(4.07) | (11.76) | (4.85) | |
EPU_HIGH × UNION_HIGH | − 0.2480*** | ||
(− 2.96) | |||
EPU_HIGH × SOCIALCAP_HIGH | − 0.0810*** | ||
(− 6.59) | |||
EPU_HIGH × CORCULTURE _HIGH | − 0.0408*** | ||
(− 2.92) | |||
UNION_HIGH | 0.1254* | ||
(1.81) | |||
SOCIALCAP_HIGH | 0.0168 | ||
(0.90) | |||
CORCULTURE_HIGH | 0.0303*** | ||
(2.94) | |||
Firm and Macroeconomic controls | YES | YES | YES |
N | 10,548 | 13,210 | 8271 |
Adj. R2 | 0.138 | 0.184 | 0.104 |
Additional Analysis
The Underlying Channels
(1) | (2) | (3) | (4) | |
---|---|---|---|---|
UNDERFUND (t + 1) | EDF | INFOASY | UNDERFUND (t + 1) | |
EPU | 0.2357*** | 0.1662*** | 0.0140*** | 0.0614** |
(9.53) | (31.36) | (2.60) | (2.47) | |
EDF | 1.0938*** | |||
(7.27) | ||||
INFOASY | 0.5168*** | |||
(6.09) | ||||
Firm and Macroeconomic controls | YES | YES | YES | YES |
Number of observations | 13,210 | 11,343 | 11,835 | 10,645 |
Adj. R2 | 0.177 | 0.426 | 0.185 | 0.224 |
Who Benefits from Employee Pension Underfunding?
(1) | (2) | (3) | (4) | (5) | (6) | (7) | |
---|---|---|---|---|---|---|---|
CEO PAY | TMT PAY | R & D | CAPEX | DIV_EQ | REP_EQ | STOCK RET | |
UNDERFUNDING_HIGH | 0.0317* | 0.0194 | − 0.0658 | − 0.0097 | − 0.0329 | − 0.1877 | 0.0004 |
(1.66) | (1.35) | (− 1.41) | (− 0.13) | (− 0.45) | (− 1.43) | (0.05) | |
EPU_HIGH | 0.1023*** | 0.0736*** | − 0.1675*** | − 0.2497*** | 0.0327 | − 0.2217 | 0.0219** |
(5.40) | (5.14) | (− 3.69) | (− 3.51) | (0.48) | (− 1.51) | (2.42) | |
EPU_HIGH × UNDERFUND_HIGH | 0.0411* | 0.0333** | 0.0768 | 0.0655 | − 0.0762 | − 0.2305 | − 0.0080 |
(1.87) | (2.01) | (1.29) | (0.75) | (− 0.87) | (− 1.45) | (− 0.72) | |
Firm and Macroeconomic controls | YES | YES | YES | YES | YES | YES | YES |
N | 10,144 | 10,144 | 13,210 | 13,210 | 13,210 | 13,210 | 13,001 |
Adj. R2 | 0.111 | 0.164 | 0.043 | 0.112 | 0.023 | 0.041 | 0.089 |