Pension Funding Decisions, Interest Rate Assumptions and Share Prices

Abstract

This paper explores how unfunded pension obligations affect the market values of firms.Firms appear to choose the interest rate they use in discounting future benefit obligations so as to balance the tax advantages of a low rate against the more healthy looking annual reports a high rate allows.Investors seem to penetrate this ruse and value firms as if obligations were figured at a standard rate.The rate thus used seems to be much lower than current long term interest rates.Pension liabilities are therefore overemphasized by the market.There is also some evidence that pension assets are undervalued.This suggests that growth of the private pension system might increase savings by investors and firms.

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