Paper #871

Title:

Pension plan funding and stock market efficiency

Authors:

Francesco Franzoni and José M. Marín

Date:

June 2005

Abstract:

The paper argues that the market signifficantly overvalues firms with severely underfunded pension plans. These companies earn lower stock returns than firms with healthier pension plans for at least five years after the first emergence of the underfunding. The low returns are not explained by risk, price momentum, earnings momentum, or accruals. Further, the evidence suggests that investors do not anticipate the impact of the pension liability on future earnings, and they are surprised when the negative implications of underfunding ultimately materialize. Finally, underfunded firms have poor operating performance, and they earn low returns, although they are value companies.

Keywords:

Pricing anomalies, DB plans, market efficiency

JEL codes:

G12, G14, G23, J26, M41

Area of Research:

Finance and Accounting

Published in:

The Journal of Finance, Volume 61, Number 2, April 2006, pp. 921-956(36)

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