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Article
What Determines Corporate Pension Fund Risk-taking Strategy?
Journal of Banking & Finance
  • Heng An, University of North Carolina at Greensboro
  • Zhaodan Huang, Utica College
  • Ting Zhang, University of Dayton
Document Type
Article
Publication Date
2-1-2013
Abstract
Corporate sponsors of defined benefit pension plans generally assume low investment risk when they have low funding ratios and high default risk, consistent with the risk management hypothesis. However, for financially distressed sponsors and sponsors that freeze, terminate, or convert defined benefit to defined contribution plans, the risk-shifting incentive (moral hazard) dominates. Pension fund risk-taking is also affected by labor unionization and sponsor incentives to maximize tax benefits, restore financial slack, and justify the accounting choices of pension assumptions. Sponsors shift toward an aggressive risk strategy when their pension plans emerge from underfunding, bankruptcy risk is reduced, or marginal tax rate decreases. Overall, we show that corporate sponsors adopt a dynamic risk-taking strategy in their pension fund investments.
Inclusive pages
597–613
ISBN/ISSN
0378-4266
Comments

Permission documentation is on file.

Publisher
Elsevier
Peer Reviewed
Yes
Citation Information
Heng An, Zhaodan Huang and Ting Zhang. "What Determines Corporate Pension Fund Risk-taking Strategy?" Journal of Banking & Finance Vol. 37 Iss. 2 (2013)
Available at: http://works.bepress.com/ting-zhang/10/