What Drives Corporate Pension Plan Contributions: Moral Hazard or Tax Benefits?

In testing moral hazard and tax benefits hypotheses regarding defined benefit plan funding and contribution incentives by incorporating sponsors' bankruptcy risk, the authors proposed that high-bankruptcy-risk sponsors have a strong moral hazard incentive because the put value of the U.S. Pensi...

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Bibliographic Details
Published in:Financial analysts journal 2013-07, Vol.69 (4), p.58-72
Main Authors: Chen, Xuanjuan, Yu, Tong, Zhang, Ting
Format: Article
Language:English
Subjects:
Asset allocation
Bankruptcy
Capital expenditures
Defined benefit plans
Economic crisis
Economic incentives
ERISA
Financial risk
Funding
Hypotheses
Incentives
Investment policy
Investments
Moral hazard
Pension contributions
Pension funds
Pension plans
Pensions
Portfolio Management
Risk management
Tax benefits
Tax incentives
Tax rates
Taxation
U.S.A
Voluntary bankruptcy
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Summary:In testing moral hazard and tax benefits hypotheses regarding defined benefit plan funding and contribution incentives by incorporating sponsors' bankruptcy risk, the authors proposed that high-bankruptcy-risk sponsors have a strong moral hazard incentive because the put value of the U.S. Pension Benefit Guaranty Corporation guarantee is high. For low-bankruptcy-risk sponsors, the put value is low; maximizing tax benefits associated with pension contributions becomes a powerful incentive. Results based on sponsors' voluntary contributions support both hypotheses.
ISSN:0015-198X
1938-3312
DOI:10.2469/faj.v69.n4.2