RFS Advance Access published online on November 2, 2009
Review of Financial Studies, doi:10.1093/rfs/hhp094
How Do Pensions Affect Corporate Capital Structure Decisions?
Kenan-Flagler Business School, University of North Carolina at Chapel Hill
Kelley School of Business, Indiana University
Send correspondence to Anil Shivdasani, Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, NC 27599; telephone: (919) 962-6124. E-mail: Anil.Shivdasani{at}Unc.edu.
JEL Classification: G32, H20, J33
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Abstract |
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This article examines the capital structure implications of defined benefit corporate pension plans. The magnitude of the liabilities arising from these pension plans is substantial. We show that leverage ratios for firms with pension plans are about 35% higher when pension assets and liabilities are incorporated into the capital structure. We estimate that the tax shields from pension contributions are about a third of those from interest payments. Pension contributions have a modest effect in lowering firms’ marginal corporate tax rates. Once pensions are considered, firms are less conservative in their choice of leverage than has been previously thought. We show that firms incorporate the magnitude of their pension assets and liabilities into their capital structure decisions.
We thank the editor, Matthew Spiegel, and two anonymous referees for their helpful comments. We are also grateful for comments and discussions from Nina Baranchuk, Jennifer Conrad, Paolo Fulghieri, Eitan Goldman, David Guilkey, Matthias Kahl, Wayne Landsman, Ron Masulis, Mitchell Petersen, Jorg Rocholl, James Schallheim, Merih Sevilir, Doug Shackelford, Sheri Tice, Josef Zechner, seminar participants at Bocconi, William and Mary, HEC Paris, Indiana, Norwegian School of Economics, Tilburg, North Carolina, Vanderbilt, Virginia Tech, Michigan, Washington, the 2005 European Finance meeting, the 2005 FMA conference, the 2006 Batten Conference, the 2006 Western Finance Association meeting, and the 2009 FIRS meetings. We are especially thankful to John Graham for his detailed suggestions and assistance with the simulation of marginal tax rates. We thank Ari Jacobs (former head of the Pension Benefits Advisory Group at Citigroup), Mark Marinello (former manager of financial operations at IBM), Jay Vivian (IBM Retirement Fund), and Joseph Krettek (Pension Benefit Guarantee Corporation) for helpful discussions.