Pension Funding Constraints and Corporate Expenditures

36 Pages Posted: 24 Jan 2010

See all articles by Weixi Liu

Weixi Liu

University of Exeter Business School - XFI Centre for Finance and Investment

Ian Tonks

University of Bristol - Department of Finance and Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2010

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 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.

Keywords: Pension contributions, financial constraints, dividend sensitivity, investment sensitivity, Pensions Act 2004

JEL Classification: G23

Suggested Citation

Liu, Weixi and Tonks, Ian, Pension Funding Constraints and Corporate Expenditures (January 1, 2010). Available at SSRN: https://ssrn.com/abstract=1540511 or http://dx.doi.org/10.2139/ssrn.1540511

Weixi Liu (Contact Author)

University of Exeter Business School - XFI Centre for Finance and Investment ( email )

University of Exeter
Xfi Building, Rennes Dr.
Exeter, EX4 3BZ
United Kingdom

Ian Tonks

University of Bristol - Department of Finance and Accounting ( email )

Department of Finance and Accounting
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

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