Asian Review of Financial Research Vol.35 No.3 pp.1-34 https://www.doi.org/10.37197/ARFR.2022.35.3.1
Optimal Funding Ratios of Defined Benefit Pension from the Perspective of Corporate Finance : A Theoretical Approach
Key Words : Defined benefit pension plans,Optimal pension funding ratios,Optimal capital structure,Firm characteristics,Firm value
This paper develops a theoretical model to derive optimal pension funding ratios of defined benefit(DB) pension plans, and discusses their characteristics and empirical implications. The main results are as follows. First, DB firms' optimal pension funding ratios are positively associated with their operating performances and corporate tax rates, while negatively associated with bankruptcy costs. Second, pension funding and financial debt service are inversely related each other, and DB firms have a certain degree of discretion in choosing their optimal pension funding ratios. Third, DB firms' pension funding ratios are expected to show negative relationship with the firms' debt ratios in the empirical tests, but intensity of their relationship becomes weaker as the sample firms in the tests get more diverse. Fourth, pension funding ratios are expected to show positive relationship with both firm value and operating performance variables, but negative relationship with financial distress variables. Their intensity becomes stronger when the proportion of large firms increases. Finally, theoretical results and predictions of the paper are largely consistent with the findings of existing empirical studies.