Effect of Debt Tax Benefits on Corporate Pension Funding and Risk-Taking

Journal of Economic Studies, Forthcoming

DOI: 10.1108/JES-04-2019-0188

Posted: 19 Jun 2020

See all articles by Kozo Omori

Kozo Omori

Osaka University of Economics, Faculty of Business Administration

Tomoki Kitamura

Musashi University - Department of Finance

Date Written: May 19, 2020

Abstract

Purpose: This study theoretically investigates the impacts of tax benefits on funding level and risk-taking of a corporate defined benefit (DB) pension plan.

Design/methodology/approach: The present value of the future tax benefits is maximized while the stockholders determine the funding level and investment risk-taking in DB plans. As a feature of DB plans, this study considers pension benefits to be pre-determined. Further, the pension beneficiary has a priority over the sponsor company's creditors for the pension reserve fund. These are seldom considered in previous studies.

Findings: It is desirable to decrease the funding level of DB plans to increase tax benefits. This is because the effect of tax exemption for the pension fund's investment income is eliminated by the change in the contribution arising from the investment's result. The optimal investment risk-taking depends on the funding level.

Originality/value: The impact of tax benefits on decision-making for DB plans is significantly different from that stated by previous studies, that is, an increase in pension funds will reduce the corporate debt. To explain corporate behavior, this study's results — derived from the essential feature of DB plans, which could not have been included in previous studies — should be considered.

Keywords: Defined Benefit Plan, Tax Benefit, Pension Funding, Pension Investment

JEL Classification: G11,G32

Suggested Citation

Omori, Kozo and Kitamura, Tomoki, Effect of Debt Tax Benefits on Corporate Pension Funding and Risk-Taking (May 19, 2020). Journal of Economic Studies, Forthcoming , DOI: 10.1108/JES-04-2019-0188, Available at SSRN: https://ssrn.com/abstract=3609872

Kozo Omori

Osaka University of Economics, Faculty of Business Administration ( email )

2-2-8 Osumi
Higashiyokogawa-ku
Osaka
Japan

Tomoki Kitamura (Contact Author)

Musashi University - Department of Finance ( email )

1-26-1 Toyotamakami
Nerima Tokyo, 1768534
Japan

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
189
PlumX Metrics