Pension Funding Constraints and Corporate Expenditures
Liu, Weixi; Tonks, Ian
Date: 1 January 2010
Publisher
University of Exeter Business School
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Abstract
This paper examines the effect of a company’s pension contributions on its dividend and investment policies. Using a sample of all FTSE350 UK listed firms with at least one defined benefit pension scheme from 2001 to 2004, we find a strong and negative relation between pension contributions and corporate dividend payments even after ...
This paper examines the effect of a company’s pension contributions on its dividend and investment policies. Using a sample of all FTSE350 UK listed firms with at least one defined benefit pension scheme from 2001 to 2004, we find a strong and negative relation between pension contributions and corporate dividend payments even after controlling for the correlation between funding status and unobserved investment opportunities. We find a weaker result using investment equations, where investment is negatively related to pension contributions but the relation is not statistically significant. Our results suggest a preference of financial rather than
real channels for firms making balance sheet adjustments. We also examine whether the new
funding requirements under the Pensions Act 2004 have had any effects on firms’ pension
contributions and accordingly their corporate expenditure decisions. We include additional data from 2005-2006, and find that both dividend and investment sensitivity to pension contributions
is more pronounced after the introduction of the new funding requirements.
Finance and Accounting
Faculty of Environment, Science and Economy
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