Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans

Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans

The Journal of Finance. February
2006, Vol. 61, Issue 1, Pages 33-71
  • Winner, 2006 Brattle Prize, First Prize Paper for the best corporate finance paper published in the Journal of Finance.
  • Winner, 2004 Western Finance Association Award for best corporate finance paper.

I exploit sharply nonlinear funding rules for defined benefit pension plans in order to identify the dependence of corporate investment on internal financial resources in a large sample. Capital expenditures decline with mandatory contributions to DB pension plans, even when controlling for correlations between the pension funding status itself and the firm’s unobserved investment opportunities. The effect is particularly evident among firms that face financing constraints based on observable variables such as credit ratings. Investment also displays strong negative correlations with the part of mandatory contributions resulting solely from unexpected asset market movements.