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Pension Regulation, Firm Borrowing, and Investment Risk
Author(s) -
Lay Margaret J.
Publication year - 2020
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12299
Subject(s) - pension , incentive , investment (military) , business , shareholder , pension fund , enterprise value , finance , capital (architecture) , agency cost , economics , actuarial science , monetary economics , microeconomics , corporate governance , archaeology , politics , political science , law , history
This article builds a new model of capital structure and nonpension investment decisions to show that regulatory and investment incentives created by accrued pension obligations exacerbate traditional agency problems between stockholders and bondholders. The article identifies conditions under which firms with accrued pension liabilities have an incentive to choose an overly risky capital structure, invest in risky projects with negative net present value, and/or under‐fund their pension accounts.