| dc.description.abstract | This dissertation consists of three main chapters. The first main chapter examines the implications of the defined benefit (DB) pension deficits on firms’ expected future growth from a market perspective. I introduce a novel method in estimating a firm’s expected growth rate based on all available public information, including companies’ financial statements, stock prices and analysts’ forecasts of future earnings. The empirical evidence shows that firms’ expected growth rates are negatively associated with the funding status of DB pension plans. Theoretically, the mechanism through which markets incorporate a pension plan’s funding status into a firm’s growth expectation is its pension deficit, which commonly increases its cost of capital and restricts its contemporary investments. As a result, the DB pension plan deficits negatively affect firms’ growth ability from the market perspective. I also find that the market tends to consider pension information and other factors – for example, financial constraints, profitability, and the period of growth expectation – to evaluate the overall effect on firms’ growth. The evidence suggests that the negative impact of the current pension deficits on a firm’s growth expectation stems from investors noting that future investments in operating activities may decline with the DB pension contributions. To determine whether the market integrates pension information into a firm’s growth prediction, I initially examine pension information transformation among various stakeholders. In the second main chapter, I further demonstrate the existence of asymmetric information for the most severely underfunded firms. The empirical evidence supports my hypothesis that pension information is not sufficiently trans parent for the most severely underfunded firms. Thus, investors require extra risk compensation, which is reflected in a higher expected stock return. This asymmetric information hypothesis is supported by a striking post-earning price drift for positive and negative earnings surprises. I also examine a firm’s merger and acquisition deal announcement effect. If an acquirer has high asymmetric information, its stock tends to be recognised as overpriced. Therefore, the market will not take an optimistic view of this deal if they use their stock as a payment means. Indeed, the evidence shows that the higher portion of cash in total payment has a higher abnormal return around the announcement date for a target firm’s stock price. Notably, this finding seems to be restricted to the most severely underfunded firms. The natural cash outflow for mandatory pension contributions is predictable for managers. Because managers are inner stakeholders with an information advantage on a DB pension plan’s actual status, it is rational to assume they could anticipate subsequent mandatory pension contributions and adopt a suitable liquidity strategy in advance. In the third main chapter, I examine whether firms increase cash holding in response to the anticipated pension contributions. The evidence suggests that when the firm sponsors the most severely underfunded pension plans, the precautionary excess cash holding will increase if the firm is financially constrained. Moreover, the value of excess cash holding is reduced for the most severely underfunded pension plans since the excess cash is mainly held for subsequent pension contributions. If firms need to compensate for severe pension deficits, investors will undervalue the excess cash holdings. The finding further demonstrates the investors determine the value of cash reserves by how the cash reserves will be used. | en_GB |
