The Effect of Internal Capital Shocks on Manager Behavior: Evidence from Changes in ERISA Pension Accounting Rules

Academics, trade groups, and pension plan sponsors argue that pension obligations constrict investment and lead to economic inefficiencies. Exploiting a 2012 change in the ERISA pension accounting rules that decreased mandatory pension contributions, I find no immediate evidence that capital expenditures, research and development, or cash acquisitions increase. My results suggest that recipients of pension funding relief increase shareholder and debtholder payouts. Shareholder (Debtholder) payouts comprise 15 (47.3) percent of the pension funding relief subsequent to the accounting rule change. In addition, recipients of pension funding relief retain more cash after the rule change. This effect is strongest for firms with higher cash flow uncertainty and for firms without credit ratings, consistent with managers retaining cash in anticipation of future financing needs.