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Pension funding and the cross section of stock returns - The case of Germany

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  • Heusel, Nicola
  • Mager, Ferdinand
Abstract
We re-examine the relation between the funding of corporate pension plans and a cross-section of stock returns. In Germany, we observe an increasing funding of historically unfunded pension plans. Firms may freely choose to underfund or not even fund pension plans at all. We find that lower funding levels are related to higher unexpected future earnings and higher stock returns. In Germany, firms with lower pension funding levels perform better than expected by the capital market in contrast to the United States and the United Kingdom. The capital market's underreaction to the earnings announcements of firms with highly underfunded pension plans compared to firms with well-funded plans is higher for short- and long-time horizons. The underreaction is substantially lower for firms with more investor attention and less pension plan and firm opacity.

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  • Heusel, Nicola & Mager, Ferdinand, 2023. "Pension funding and the cross section of stock returns - The case of Germany," Journal of Banking & Finance, Elsevier, vol. 150(C).
    • Handle: RePEc:eee:jbfina:v:150:y:2023:i:c:s0378426623000419
    DOI: 10.1016/j.jbankfin.2023.106816
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    Cited by:

    1. Goto, Shingo & Yanase, Noriyoshi, 2023. "Corporate governance and shareholder-employee risk-shifting: Evidence from corporate pension plan sponsors," Finance Research Letters, Elsevier, vol. 58(PA).

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    More about this item

    Keywords

    Pension underfunding; Pension regulation; Market efficiency; Limited attention; Firm opacity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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