Investment Decisions of Defined Benefit Pension Plans
By Zhichuan Frank Li, Jun Wang & Yuqi Zhang
This paper examines the determinants of defined benefit (DB) pension plan investment decisions of U.S. corporations with the largest 100 DB plans (Milliman 100 companies). We test two contradicting theories on DB plans. The risk-management theory indicates that firms tend to reduce risk in their pension investments when facing high risk, and the risk-shifting theory predicts the opposite because the funds’ downside risk is hedged by federal government insurance. We find in normal periods the risk management argument dominates while in crisis periods our results support the risk-shifting argument. In particular, corporations with relatively low profitability, high distress, and high pension obligations tend to reduce pension investment in risky assets while increase risky investment during crisis.
Source SSRN
