| The purpose of this study is (1) to develop a theoretical model which links defined benefit pension plan assets and benefits to the market value of shareholder equity, and (2) to test empirically whether the market values pension assets and benefits as corporate assets and liabilities.;An empirical version of the cross-sectional equity valuation model is estimated for three years, 1979, 1980, and 1981, to look for evidence whether pension assets and liabilities are priced as corporate assets and liabilities, and thus, whether pension fund property rights lie with the firm. The basic set of empirical results is consistent with the theoretical model that pension fund property rights do in fact lie with the firm. However, the lack of robustness makes the evidence less conclusive.;The theoretical model demonstrates that firms and workers choose to enter into defined benefit pension contracts because of the private welfare gain associated with saving a portion of the workers' marginal product in a defined benefit plan. However, the degree to which firm equity value is affected depends upon how the firm and its workers share (1) the tax-shield created by saving in the pension plan, and (2) pension fund asset risk--i.e., where the pension fund property rights lie. Coefficients for pension assets and liabilities are derived within a theoretical equity valuation framework based on the accounting identity. |
