Academic journal article Journal of Risk and Insurance

Japanese Corporate Pension Plans and the Impact on Stock Prices

Academic journal article Journal of Risk and Insurance

Japanese Corporate Pension Plans and the Impact on Stock Prices

Article excerpt


This study focuses on the stock market impact of Japanese corporate decisions to adopt pension plans. Implementing corporate pension plans in Japan is complicated because they are heavily regulated by the government and the traditional lump-sum-only severance benefit plans already exist, requiring interfacing newly adopted plans with existing ones. Using the GARCH estimation method, the market model applied in this article for the relatively long period 1975-1995 yields evidence that suggests that the stock market responds to some of the more specific characteristics of adopted plans. Alternative specifications of the pension "event" also suggest that relatively little of the market impact comes from public announcements about pension adoption occasioned by the release of a firm's financial statement.


Since the publication of the American Accounting Association's A Statement of Basic Accounting Theory in 1966, major developments in the economic theory of accounting have emphasized the informational content of accounting and its impact on the financial market. An important strand of empirical research that it has spawned, the semi-strong efficient capital market hypothesis originated by Fama (1970), encompasses analyses of the informational content of corporate earnings, as well as that of depreciation and other accounting methods employed by firms. For example, Ball (1972) and Biddle and Lindahl (1982) analyze the tax consequences and stock price reactions to a firm's decision to adopt the LIFO (last-in first-out) inventory valuation method. These studies generally support the view that the financial market effectively utilizes accounting information, particularly as it relates to tax consequences. (1)

With respect to the stock market impact of corporate pensions, Feldstein and Seligman (1981), Daley (1984), and Bulow et al. (1987), among others, analyze the relationship between unfunded pension liabilities and share prices and find that unfunded vested pension liabilities adversely affect the market valuation of a firm. The findings are consistent with the underlying hypothesis, since an unfunded pension liability increases the firm's future obligations at the same time that the firm foregoes current corporate tax benefits associated with pension plans. (2) In addition, Alderson and Chen (1986), VanDerhei (1987), Moore and Pruitt (1990), and Alderson and VanDerhei (1992) examine whether and how the termination of overfunded plans impacts positively on share prices. Both the evidence and the argument regarding this latter linkage are more mixed. Interestingly, however, Mittelsteadt and Regier (1993) find evidence that when overfunded defined benefit plans are terminated, share prices tend to rise, causing a positive wealth transfer to shareholders, whereas defined-contribution plans that cannot be overfunded have no such effect.

While the preceding studies, using U.S. data, have analyzed the effect of either unfunded or overfunded pension liabilities of firms that already have plans in place, none have analyzed the effect of corporate decisions to adopt plans in the first place. This may not be surprising in view of the fact that corporate pension plans are widespread among American corporations, with some plans dating back to the 1920s. (3) In contrast, Japanese plans have been adopted more recently, albeit in a heavily regulated economic environment. The maintained hypothesis underlying this study is as follows:

Hypothesis: The adoption of pension plans by Japanese corporations (in the form of either the tekikaku or kosei variety, as explained in the following section) signals information about expectations of future earnings, which in turn impacts positively on their share prices.

The primary incentive for a corporation to adopt a pension plan, relative to the alternative of relying solely on a traditional lump-sum payment plan, is the greater tax advantage associated with a newly adopted pension plan. …

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