I thank three referees and an Associate Editor for very useful comments.
Sponsoring Company Finance, Investment and Pension Plan Funding†
Article first published online: 1 JUN 2007
The Economic Journal
Volume 117, Issue 520, pages 738–760, April 2007
How to Cite
Webb, D. C. (2007), Sponsoring Company Finance, Investment and Pension Plan Funding. The Economic Journal, 117: 738–760. doi: 10.1111/j.1468-0297.2007.02048.x
- Issue published online: 1 JUN 2007
- Article first published online: 1 JUN 2007
- Submitted: 16 August 2004 Accepted: 27 September 2005
This article presents a model of the interaction of a company's financial and real investment decisions with the financing of its defined benefit pension plan. The pension plan deficit is a debt of the company, with explicit funding requirements and priority in the event of company insolvency. Pension plan deficits and options on future deficits and surpluses affect investment incentives as does the size and composition of company debt. We examine incentives for the firm to pay dividends rather than fund the pension plan and incentives to overfund the pension plan. The effects of pension benefit insurance and minimum funding requirements are shown.