Bridge over ocean
1 July 2013 Financial Analysts Journal Volume 69, Issue 4

What Drives Corporate Pension Plan Contributions: Moral Hazard or Tax Benefits?

  1. Xuanjuan Chen
  2. Tong Yu
  3. Ting Zhang

In testing moral hazard and tax benefit hypotheses regarding defined benefit plan funding and contribution incentives by incorporating sponsors’ bankruptcy risk, the authors proposed that high-bankruptcy-risk sponsors have a strong moral hazard incentive because the put value of the U.S. Pension Benefit Guaranty Corporation guarantee is high. For low-bankruptcy-risk sponsors, the put value is low; maximizing tax benefits associated with pension contributions becomes a powerful incentive. Results based on sponsors’ voluntary contributions support both hypotheses.

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