Pension Funding Decisions, Interest Rate Assumptions and Share Prices / Martin Feldstein, Randall Morck.

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Feldstein, Martin

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w0938.Publication details: Cambridge, Mass. National Bureau of Economic Research 1982.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper explores how unfunded pension obligations affect the market values of firms. Finns 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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Working Paper	Biblioteca Digital	Colección NBER	nber w0938 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w0935 Optimal Funding and Asset Allocation Rules for Defined-Benefit Pension Plans /	nber w0936 A Framework for Monetary and Banking Analysis /	nber w0937 Products Liability, Consumer Misperceptions, and Market Power /	nber w0938 Pension Funding Decisions, Interest Rate Assumptions and Share Prices /	nber w0939 Torts in Which Victim and Injurer Act Sequentially /	nber w0940 Minimum Hours Constraints and Retirement Behavior /	nber w0941 The Leading Indicator Approach to Economic Forecasting--Retrospect and Prospect /	Next

July 1982.

This paper explores how unfunded pension obligations affect the market values of firms. Finns 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.