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Are Companies Offloading Risk onto Employees in Times of Uncertainty? Insights from Corporate Pension Plans

Author

Listed:
  • Douglas Cumming

    (Florida Atlantic University
    University of Birmingham)

  • Fanyu Lu

    (University of Adelaide)

  • Limin Xu

    (University of Adelaide)

  • Chia-Feng (Jeffrey) Yu

    (Xi’an Jiaotong-Liverpool University)

Abstract

We investigate how firms adjust corporate pension plans in response to economic policy uncertainty (EPU). Using a sample of US-listed firms, we find that firms increase pension underfunding levels when facing higher EPU. The result is robust to controlling for pension portfolio returns, discount rates, plan sizes, pension liability, numbers of employees, other macroeconomic factors, difference-in-differences and instrumental variable estimation, and additional evidence of pension risk-shifting. Further analysis reveals that financial distress and information asymmetry induced through EPU are the potential channels. The effect is stronger for firms having CEOs being excessively paid, using cash flow as a performance metric in CEO compensation, paying high dividends, and having short-term institutional investors, whereas the presence of unions, positive corporate culture, and social capital alleviate the effect. Notably, managers, not shareholders, appear to be the party reaping the benefits. Our findings suggest that firms may shift risk to employees in response to heightened uncertainty and institutional characteristics play a moderating role in this crucial business ethics issue.

Suggested Citation

  • Douglas Cumming & Fanyu Lu & Limin Xu & Chia-Feng (Jeffrey) Yu, 2024. "Are Companies Offloading Risk onto Employees in Times of Uncertainty? Insights from Corporate Pension Plans," Journal of Business Ethics, Springer, vol. 195(3), pages 579-598, December.
    • Handle: RePEc:kap:jbuset:v:195:y:2024:i:3:d:10.1007_s10551-024-05655-6
    DOI: 10.1007/s10551-024-05655-6
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    More about this item

    Keywords

    Employee pensions; EPU; Risk shifting; Stakeholder conflicts;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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