Pension funding and the cross section of stock returns - The case of Germany

We re-examine the relation between the funding of corporate pension plans and a cross-section of stock returns. In Germany, we observe an increasing funding of historically unfunded pension plans. Firms may freely choose to underfund or not even fund pension plans at all. We find that lower funding...

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Bibliographic Details
Published in:Journal of banking & finance 2023-05, Vol.150, p.106816, Article 106816
Main Authors: Heusel, Nicola, Mager, Ferdinand
Format: Article
Language:English
Subjects:
Firm opacity
Limited attention
Market efficiency
Pension regulation
Pension underfunding
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Summary:We re-examine the relation between the funding of corporate pension plans and a cross-section of stock returns. In Germany, we observe an increasing funding of historically unfunded pension plans. Firms may freely choose to underfund or not even fund pension plans at all. We find that lower funding levels are related to higher unexpected future earnings and higher stock returns. In Germany, firms with lower pension funding levels perform better than expected by the capital market in contrast to the United States and the United Kingdom. The capital market's underreaction to the earnings announcements of firms with highly underfunded pension plans compared to firms with well-funded plans is higher for short- and long-time horizons. The underreaction is substantially lower for firms with more investor attention and less pension plan and firm opacity.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2023.106816