TY - JOUR
T1 - Managerial risk taking incentives and corporate pension policy
AU - Anantharaman, Divya
AU - Lee, Yong Gyu
N1 - Funding Information:
An earlier version of this paper was titled “Governance and corporate pension policy.” We are very grateful to Elizabeth Chuk for the pre-Statements of Financial Accounting Standards 132(R) pension asset allocation data, John Graham for the marginal tax rate data, Lynn LoPucki for the UCLA-LoPucki Bankruptcy Research Database, William Schwert (the editor), Terry Shevlin (the referee), David Hollanders (discussant), Bjorn Jorgensen, Anil Verma, Johanna Weststar, Han Yi (discussant), participants at the Netspar International Pension Research Workshop 2011 and the American Accounting Association 2011 annual meeting, and many colleagues for useful comments. We thank Seokyoun Hwang, Jongkyum Kim, Kaitlin Morecraft, and Gsong Yoo for able research assistance. Part of the research for this paper was funded by 2012 Professional Staff Congress-City University of New York research award .
PY - 2014/2
Y1 - 2014/2
N2 - We examine whether the compensation incentives of top management affect the extent of risk shifting versus risk management behavior in pension plans. We find that risk shifting through pension underfunding (and, to a lesser extent, through pension asset allocation to risky securities) is stronger with compensation structures that create high wealth-risk sensitivity (vega) and weaker with high wealth-price sensitivity (delta). These findings are stronger for chief financial officers (CFOs) than for chief executive officers (CEOs), suggesting that pension policy falls within the CFO's domain. Risk shifting through pension underfunding is also lower when the CFO's personal stake in the pension plan is larger. Overall, these findings show that top managers' compensation structure is an important driver of corporate pension policy. They also highlight firms within which the moral hazard concerns fueled by Pension Benefit Guaranty Corporation insurance are most relevant.
AB - We examine whether the compensation incentives of top management affect the extent of risk shifting versus risk management behavior in pension plans. We find that risk shifting through pension underfunding (and, to a lesser extent, through pension asset allocation to risky securities) is stronger with compensation structures that create high wealth-risk sensitivity (vega) and weaker with high wealth-price sensitivity (delta). These findings are stronger for chief financial officers (CFOs) than for chief executive officers (CEOs), suggesting that pension policy falls within the CFO's domain. Risk shifting through pension underfunding is also lower when the CFO's personal stake in the pension plan is larger. Overall, these findings show that top managers' compensation structure is an important driver of corporate pension policy. They also highlight firms within which the moral hazard concerns fueled by Pension Benefit Guaranty Corporation insurance are most relevant.
KW - Defined benefit pensions
KW - Executive compensation
KW - Incentives
KW - Risk shifting
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U2 - 10.1016/j.jfineco.2013.10.009
DO - 10.1016/j.jfineco.2013.10.009
M3 - Article
AN - SCOPUS:84891664439
VL - 111
SP - 328
EP - 351
JO - Journal of Financial Economics
JF - Journal of Financial Economics
SN - 0304-405X
IS - 2
ER -