Pension Plan Funding and Stock Market Efficiency




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    • Francesco Franzoni is at the Department of Finance, HEC School of Management, 1 rue de la Liberation, Jouy en Josas, 78351, France; José M. Marín is at the Department of Economics and Business, Universitat Pompeu Fabra (UPF), and CREA, c. R. Trias Fargas 25-27, Barcelona, 08005, Spain. The authors are grateful to Wayne Ferson, Ulrich Hege, Harrison Hong, Jonathan Lewellen, Randall Morck, Jacques Olivier, and Bruno Solnik, Robert Stambaugh (the editor), and an anonymous referee for helpful comments. The authors thank Antoni Sureda Ganila for excellent research assistantship. Franzoni is also a member of GREGHEC, CNRS unit, FRE 2810. Marín acknowledges financial support from the Spanish Ministry of Science and Technology (BEC2002-00429 Grant) and from the BBVA Foundation.


The paper argues that the market significantly overvalues firms with severely underfunded pension plans. These companies earn lower stock returns than firms with healthier pension plans for at least 5 years after the first emergence of the underfunding. The low returns are not explained by risk, price momentum, earnings momentum, or accruals. Further, the evidence suggests that investors do not anticipate the impact of the pension liability on future earnings, and they are surprised when the negative implications of underfunding ultimately materialize. Finally, underfunded firms have poor operating performance, and they earn low returns, although they are value companies.