RESEARCH RADAR
“How corporate pensions affect stock returns: the role of R&D expenditures" published in June 2023 in the Journal of Financial Management, Markets and Institutions by Alberto Dreassi (MIB Core Faculty and University of Trieste), M. Kabir Hassan (University of New Orleans), M. Sydul Karim (Kalamazoo College) and Andrea Paltrinieri (Università Cattolica del Sacro Cuore).
Introduction
Authors examine the stock return implications of corporate-defined benefit pension plans in innovative U.S. firms and in R&D- and patent-sorted portfolio specifications. They find that investors underreact to firms increasing off-balance-sheet liabilities. Pensions represent material off-balance-sheet liabilities: in their extensive and large sample (1985–2017, 2541 firms for 26,522 observations), entities with pension plans are 38% more levered after integrating pension liabilities and assets into the firms’ capital structure. Authors find that R&D-intensive firms increasing the size of their pension liability subsequently underperform their benchmark returns. Through six alternative R&D-market capitalization portfolios, they also find that this association is stronger for smaller firms. Finally, the relationship remains persistent over a long horizon and is robust to endogeneity concerns.
Conclusions
This study examines the impact of defined benefit pension plans on stock returns for R&D-sorted portfolios. The findings indicate that firms with high R&D intensity that increase pension size experience subsequent underperformance in stock returns. The negative relationship remains significant over a long period, particularly for smaller firms with high R&D levels. The results suggest that investors underreact to firms' decisions to increase pension liabilities. The study also highlights the need for future research to address data biases, explore causal relationships, and consider defined contribution schemes in the analysis.
Authors
A. Dreassi, Senior Lecture of Insurance, Accounting and Control at MIB Trieste School of Management and Associate Professor of Banking and Finance at the University of TriesteM. Kabir Hassan, Ph.D. in Finance, Professor at University of New Orleans
Md. Sydul Karim, Ph.D. in Financial Economics, Assistant Professor of Finance at Kalamazoo College
Andrea Paltrinieri, Ph.D. in Business Administration, Associate Professor at the Università Cattolica del Sacro Cuore, Milan.
Investors face challenges when they analyze firms, especially in the presence of less tangible items that are appraised. Among these are investments in R&D or the sponsoring of DB pension funds. Is there a trade-off in stock market performance between R&D and employees’ pensions? In this article, we show that capital markets react negatively to increases in pension liabilities, with stronger and persistent effects for high R&D and smaller firms. Our results entail relevant policy implications: investments in innovation are needed to foster development and economic growth, but they seem to disincentivize the engagement towards long-term workforce welfare.
