Pension Overhang and Corporate Investment

Abstract

We exploit an exogenous, universal increase in discount rates mandated by the Moving Ahead for Progress Act (MAP-21) to identify the impact of pension overhang on investment. We find that firms with large unfunded pension liabilities increase investment by 13% after the MAP-21 induced decrease in pension liabilities. The effects are more pronounced for ex- ante financially constrained firms, yet pension-related cash flows have a minimal impact on investment. Credit ratings of affected firms improve while CEOs with more pay-for- performance and longer horizon increase investment to a greater extent after MAP-21. Our results highlight the role of pension overhang on investment.

Keywords: Pension liability, corporate investment, overhang, leverage

JEL Classification: G31, G32