Pension return assumptions and shareholder-employee risk-shifting

Shingo Goto, Noriyoshi Yanase

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)


Firm managers of defined-benefit (DB) pension plan sponsors reveal their primary motives — risk-shifting or risk-management — through their assumed expected rates of return (ERRs) on the plan assets. Managers with risk-shifting motives choose high ERRs to exploit flexible internal financing from employees via pension underfunding. Those with risk-management motives choose low ERRs to reduce future cash-flow uncertainty by improving the pension funding status. We examine if ERRs predict the firms’ future cash-flow allocation between pension funding and corporate investments, in a Japanese sample that mitigates the selection bias concern for US DB plan sponsors. Using dynamic panel regressions that control for lagged dependent variables, firms’ business prospects, and unobserved fixed effects, we show that higher ERRs precede higher capital investments, R&D expenses, and net pension obligations while revealing managerial aggression, especially among firms with high external financing costs. Higher ERRs predict higher market-to-book ratios for the firms with larger R&Ds and/or underfunding, suggesting that the risk-shifting channel of internal financing with high ERRs can help alleviate underinvestment problems.

Original languageEnglish
Article number102047
JournalJournal of Corporate Finance
Publication statusPublished - 2021 Oct
Externally publishedYes


  • Corporate pensions
  • Defined-benefit (DB) plans
  • Dynamic panel data analysis
  • Employees
  • Internal financing
  • Pension assumptions
  • Pension funding
  • Risk management
  • Risk shifting
  • Shareholders
  • Underfunding
  • Underinvestment

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management


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