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Investment policies and risk sharing by corporate pensions

Author

Listed:
  • Li, C. Wei
  • Yao, Tong
  • Ying, Jie

Abstract

Using a corporate risk management model, we show that the investment risk sharing features of defined benefit corporate pensions help explain their aggressive investment policies as well as their diminishing popularity over time. For reasonable parameter values, the model successfully captures key empirical patterns including pension asset allocation and the relations among pension investment risk, corporate bankruptcy probability, and pension funding. Consistent with the observed trend, we find that switching from defined-benefit plans to defined-contribution plans enhances risk transfer and reduces firms' pension funding costs.

Suggested Citation

  • Li, C. Wei & Yao, Tong & Ying, Jie, 2024. "Investment policies and risk sharing by corporate pensions," Journal of Economic Dynamics and Control, Elsevier, vol. 165(C).
    • Handle: RePEc:eee:dyncon:v:165:y:2024:i:c:s0165188924000836
    DOI: 10.1016/j.jedc.2024.104891
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    More about this item

    Keywords

    Defined benefit pensions; Pension investment;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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