Underinvestment vs. overinvestment
evidence from price reactions to pension contributions
Additional information
Authors
Type
Journal Article
Year
2008
Language
English
Abstract
Mandatory contributions to defined benefit pension plans provide a unique identification strategy to estimate the market's assessment of the value of internal resources controlling for investment opportunities. The price decrease following a pension-induced drop in cash is magnified for firms that appear a priori more financially constrained, suggesting a negative effect of financing frictions on investment. In contrast, low control on managerial discretion attenuates the negative price reaction to contributions consistent with empire-building theories. While overinvestment seems to be the prevalent distortion in a panel of large firms, underinvestment appears to dominate in a sample that is more representative of the cross-section of listed companies.
Keywords
Financial constraints, corporate governance, underinvestment, overinvestment
Journal
Journal of financial economics
Volume
92
Number ( Month )
3
Pages (or article number)
491-518
Diffusion
License
License undefined
Visibility
Public
Status open access
Green
