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- Title
UNFUNDED PENSION LIABILITIES' IMPACT ON SECURITY RETURNS BY INDUSTRY.
- Authors
Stunda, Ronald
- Abstract
With unfunded pension liabilities totaling in excess of $2 trillion, publicly traded firms face a "fiscal cliff" of their own when it comes to the effect that these liabilities in turn have on firm bottom lines. With regard to assessing the effect that these pension liabilities have on stock prices, scant research exists. Extant studies find that unfunded pension liabilities increase riskiness of firms, thus placing pressure on firms' ability to generate needed future capitalization. Most research is silent with respect to the direct effect that pension liabilities have on major industries. This study assesses the role that pensions have on security returns. A twenty year analysis (1996-2015) is conducted which includes analyzing 1,907 firms with unfunded/underfunded pension plans and 710 firms with fully funded pension plans. Findings suggest that when a firm maintains an underfunded pension plan, that there exists a significant negative correlation between accounting earnings and stock return. When, however, a firm maintains a fully funded pension plan, there is significant positive correlation between accounting earnings and stock return. The result is not good news for pension fund managers of firms with unfunded/underfunded pension plans. In addition, an industry analysis was performed of six major industries for the underfunded pension plan firms. Findings suggest that the industrials and utilities industries contain the highest significantly negative correlation with accounting earnings and stock prices. This indicates that firms in these two industries should be particularly concerned about unfunded or underfunded pension plans because of the effect that they may have on accounting earnings, investor reaction, and thus stock price.
- Subjects
UNDERFUNDED pension plans; PENSION trusts; PENSIONS; STOCK prices; INVERSE relationships (Mathematics)
- Publication
International Journal of the Academic Business World, 2018, Vol 12, Issue 2, p19
- ISSN
1942-6089
- Publication type
Article