Journal article

Underinvestment vs. overinvestment : Evidence from price reactions to pension contributions

  • Franzoni, Francesco Istituto di finanza (IFin), Facoltà di scienze economiche, Università della Svizzera italiana, Svizzera
Published in:
  • Journal of financial economics. - Elsevier. - 2009, vol. 92, no. 3, p. 491-518
English Mandatory contributions to defined benefit pension plans provide a unique identification strategy to estimate the market's assessment of the value of internal resources controlling for investment opportunities. The price decrease following a pension-induced drop in cash is magnified for firms that appear a priori more financially constrained, suggesting a negative effect of financing frictions on investment. In contrast, low control on managerial discretion attenuates the negative price reaction to contributions consistent with empire-building theories. While overinvestment seems to be the prevalent distortion in a panel of large firms, underinvestment appears to dominate in a sample that is more representative of the cross-section of listed companies.
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