WHEN DO COMPANIES FUND THEIR DEFINED BENEFIT PENSION PLANS?

This paper extends the accounting academic literature on pension funding strategy by looking at a more recent data set, directly examining contributions to defined benefit pension plans, and considering the effect of changing economic conditions over time on pension plan funding. I find that the average funded status of defined benefit pension plans has changed over time in response to changing market conditions. In addition, managers respond to these changes differently depending on firm specific incentives to make contributions to their pension plans. I find that companies that have employees protected by unions, more costly plans, higher levels of cash from operations, higher levels of plan underfunding, tax incentives, and debt contracting incentives contribute more to their pension plans. In contrast, I find that companies with other investment opportunities for their free cash, and companies with pension plans assets earning higher returns contribute less to their pension plans. This paper has implications for regulators and standard setters considering how to deal with pension funding shortfalls, accounting professionals auditing companies with pension plans, CFOs determining their company’s pension funding strategy, and investors and creditors evaluating the risks that companies with defined benefit pension plans are taking on.