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Pension Policy and the Value of Corporate-Level Investment

Authors

  • Michael J. Alderson,

  • Neil L. Seitz

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    • Michael J. Alderson is a Professor of Finance in the Department of Finance at Saint Louis University in St. Louis, MO. Neil L. Seitz is a Professor of Finance in the Department of Finance at Saint Louis University in St. Louis, MO.


  • We thank John T. Alderson of Towers Watson, Brian Betker, Bidisha Chakrabarty, Bill Christie (Editor) and an anonymous reviewer for helpful comments and suggestions. We are also grateful to John Graham for providing us with the marginal income tax rates used in the study. An earlier version of this paper was presented at the 2011 FMA Conference (Denver). All errors remain our own.

Abstract

We examine how pension policy affects the value of corporate-level investment to the firm and its various claimants using Monte Carlo simulation. Shareholders lose the greatest amount of project value to the pension plan when it is undiversified across asset classes. Improved funding levels mandated by the provisions of the Pension Protection Act of 2006 generally reduce those wealth transfers. Thus, mitigation of the overhang effect joins the reduction of financial distress costs as a motivation for holding both stocks and bonds in the pension fund.

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