How Do Pensions Affect Corporate Capital Structure Decisions?

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How Do Pensions Affect Corporate Capital Structure Decisions?

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[public.kenan-flagler.unc.edu]

by Anil Shivdasani , Irina Stefanescu , Nina Baranchuk , Jennifer Conrad , Paolo Fulghieri , Eitan Goldman , David Guilkey , Matthias Kahl , Wayne Landsman , Ron Masulis , Mitchell Petersen , Jorg Rocholl , James Schallheim , Merih Sevilir , Doug Shackelford , Sheri Tice , Josef Zechner , William , Mary , Indiana, Norwegian Hec Paris

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BibTeX

@MISC{Shivdasani_howdo,
    author = {Anil Shivdasani and Irina Stefanescu and Nina Baranchuk and Jennifer Conrad and Paolo Fulghieri and Eitan Goldman and David Guilkey and Matthias Kahl and Wayne Landsman and Ron Masulis and Mitchell Petersen and Jorg Rocholl and James Schallheim and Merih Sevilir and Doug Shackelford and Sheri Tice and Josef Zechner and William and Mary and Indiana and Norwegian Hec Paris},
    title = {How Do Pensions Affect Corporate Capital Structure Decisions?},
    year = {}
}

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Abstract

Abstract This paper examines the capital structure implications of defined benefit corporate pension plans. The magnitude of the liabilities arising from these pension plans is substantial. We show that leverage ratios for firms with pension plans are about 35% higher when pension assets and liabilities are incorporated into the capital structure. We estimate that the tax shields from pension contributions are about a third of those from interest payments. Pension contributions have a modest effect in lowering firms' marginal corporate tax rates. Once pensions are considered, firms are less conservative in their choice of leverage than has been previously thought. We show that firms incorporate the magnitude of their pension assets and liabilities into their capital structure decisions.

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