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E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 5, No. 21: November 5, 2004
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Publisher: Employment, Labor, Compensation & Pension Law Journals
a division of
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and Social Science Research Network (SSRN)
Editor: PAMELA PERUN
Urban Institute
Mailto:pamela@planetnow.com
Copyright: SSEP, Inc. 2004. All rights reserved.
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Topic of This Issue:
Pension Funding
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T A B L E of C O N T E N T S
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NEW and FORTHCOMING ARTICLES
"Public Pension Funds and Operating Budgets: A Tale of Three
States"
Public Budgeting and Finance, Vol. 24, No. 2, pp. 59-73,
June 2004
JUN PENG
University of Arizona
Eller College of Business and Public Administration
WORKING PAPERS
"Pension Plan Funding and Stock Market Efficiency"
FRANCESCO A. FRANZONI
HEC - School of Management
JOSé M. MARíN
Universitat Pompeu Fabra
"Pension Funds and Emerging Markets"
JORGE ANTONIO CHAN-LAU
International Monetary Fund (IMF)
Research Department
"The Impact of Pension Assumptions on Firm Value"
STEPHEN BROWN
Emory University
Department of Accounting
"Pension Plan Investment Management Mandates: An Empirical
Analysis of Manager Selection"
JERRY T. PARWADA
University of New South Wales
School of Banking and Finance
ROBERT W. FAFF
Monash University
Department of Accounting and Finance
"Managerial Opportunism and Earnings Manipulation: Evidence from
Defined Benefit Pension Plans"
DANIEL B. BERGSTRESSER
Massachusetts Institute of Technology (MIT)
Department of Economics
MIHIR A. DESAI
Harvard University
Finance Unit
National Bureau of Economic Research (NBER)
JOSHUA RAUH
Massachusetts Institute of Technology (MIT)
Department of Economics
"The Cult of the Equity for Pension Funds: Should it Get the
Boot?"
CHARLES M. SUTCLIFFE
University of Southampton
School of Management
S S R N I N F O R M A T I O N
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scholarly discourse.
N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"Public Pension Funds and Operating Budgets: A Tale of Three
States"
Public Budgeting and Finance, Vol. 24, No. 2, pp. 59-73,
June 2004
BY: JUN PENG
University of Arizona
Eller College of Business and Public Administration
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=537944
Contact: JUN PENG
Email: Mailto:peng@bpa.arizona.edu
Postal: University of Arizona
Eller College of Business and Public
Administration
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108 UNITED STATES
ABSTRACT:
This article provides a normative framework for understanding
the important link between public pension fund management and
government operating budgets. Three aspects of pension fund
management are discussed that have a significant impact on the
operating budget: pension contribution, investment strategy, and
the funding of pension liabilities. Three cases concerning West
Virginia, New Jersey, and New York City are discussed to
illustrate these three important aspects. The normative
framework and the case studies demonstrate two important
principles in prudently managing public pension funds: ensuring
intergenerational equity and protecting the long-term health of
government budgets.
______________________________
W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Pension Plan Funding and Stock Market Efficiency"
BY: FRANCESCO A. FRANZONI
HEC - School of Management
JOSé M. MARíN
Universitat Pompeu Fabra
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=590683
Date: September 14, 2004
Contact: FRANCESCO A. FRANZONI
Email: Mailto:franzoni@hec.edu
Postal: HEC - School of Management
78351 Jouy-en-Josas Cedex, FRANCE
Co-Auth: JOSé M. MARíN
Email: Mailto:jose.marin@upf.edu
Postal: Universitat Pompeu Fabra
Ramon Trias Fargas 25-27
08005 Barcelona, SPAIN
ABSTRACT:
As a consequence of the recent bear stock market, the aggregate
funding level of defined benefit pension plans has tremendously
deteriorated. A relevant issue is whether the market value of
the firms sponsoring these plans reflects their pension
liabilities. In sharp contrast with earlier studies, this paper
presents evidence indicating that the market has significantly
overpriced firms with severely underfunded pension plans. We
show that these companies earn lower stock returns than firms
with healthier pension plans, and the underperformance persists
for at least five years after the first emergence of the large
underfunding. Moreover, the low returns are not explained by
risk, return momentum, earnings momentum, or accruals. For this
reason, we conclude that we have identified an additional layer
of mispricing. We propose an explanation where investors do not
anticipate the impact of the pension liability on future
earnings and cash flows, and they are surprised when the
negative implications of underfunding finally materialize.
Consistent with this view, we provide significant evidence of
market surprises for severely underfunded firms. Finally, we
characterize these firms as past losers which, although value
companies, pay low returns.
JEL Classification: G12
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"Pension Funds and Emerging Markets"
BY: JORGE ANTONIO CHAN-LAU
International Monetary Fund (IMF)
Research Department
Paper ID: IMF Working Paper No. 04/181
Date: September 2004
Contact: JORGE ANTONIO CHAN-LAU
Email: Mailto:JCHANLAU@IMF.ORG
Postal: International Monetary Fund (IMF)
Research Department
700 19th Street NW
Washington, DC 20431 UNITED STATES
Phone: 202-623-4271
Fax: 202-623-6334
Paper Requests:
Contact IMF Publication Services at Mailto:publications@imf.org
700 19th St NW, Washington, DC 20431 Phone:(202)623-7430
Fax:(202) 623 7201. Printed copies US$7, prepayment required.
ABSTRACT:
This paper focuses on the investment behavior of pension funds
in developed and emerging market countries. First, it analyzes
the main determinants of the emerging market asset allocation of
pension funds in developed countries. Second, it assesses how
pension funds in emerging markets have contributed to the
development of local securities markets. Third, it analyzes the
determinants of pension funds' investment performance. The paper
concludes with a discussion of why the emerging market asset
allocation of pension funds in developed countries is likely to
increase and what the challenges faced by pension funds in
emerging markets are.
JEL Classification: G23
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"The Impact of Pension Assumptions on Firm Value"
BY: STEPHEN BROWN
Emory University
Department of Accounting
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=596666
Date: September 2004
Contact: STEPHEN BROWN
Email: Mailto:stephen_brown@bus.emory.edu
Postal: Emory University
Department of Accounting
Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322 UNITED STATES
Phone: 404-727-1634
Fax: 404-727-6313
ABSTRACT:
I examine the association between disclosed financial accounting
data and firm value, while incorporating the effect of
managerial discretion in reporting those data. I focus on the
assumptions used to compute a firm's pension liability. I find
that firm values are consistent with analysts being aware of the
likely influence of reporting incentives on managers' choices of
assumptions. Analysts appear to be aware of the incentives
associated with contracting considerations and where they infer
that such incentives have induced managers to choose
obligation-reducing assumptions, they treat $1 of reported
obligation as if it were an obligation of more than $1. These
findings suggest that analysts recognize managers' use of
assumptions that are not justified by the firm's operating
environment and that they discount the effect of those
assumptions on the disclosed accounting numbers.
JEL Classification: M41, M43, G23, G14, G29
______________________________
"Pension Plan Investment Management Mandates: An Empirical
Analysis of Manager Selection"
BY: JERRY T. PARWADA
University of New South Wales
School of Banking and Finance
ROBERT W. FAFF
Monash University
Department of Accounting and Finance
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=593226
Date: September 20, 2004
Contact: JERRY T. PARWADA
Email: Mailto:JERRY@SIRCA.ORG.AU
Postal: University of New South Wales
School of Banking and Finance
Sydney NSW 2052, AUSTRALIA
Co-Auth: ROBERT W. FAFF
Email: Mailto:Robert.Faff@buseco.monash.edu.au
Postal: Monash University
Department of Accounting and Finance
P.O. Box 11E
East Caulfield
Clayton, Victoria 3800, AUSTRALIA
ABSTRACT:
We examine the impact of several factors on the selection of
portfolio managers for Australian pension plan mandates.
Performance measures do not affect the probability of a mandate
allocation. Pension sponsors tend to choose managers with
top-quartile five-year performance who have recently beaten a
market benchmark. Management expenses have a negative impact on
a manager's chances. A surprising result is sponsors' tolerance
for high portfolio trading costs. Mandates are spread across
manager investment styles. The style and institutional
attributes of preferred managers suggest trustees' reputation
and prudential concerns matter, particularly for the aggregate
annual mandate allocations.
______________________________
"Managerial Opportunism and Earnings Manipulation: Evidence from
Defined Benefit Pension Plans"
BY: DANIEL B. BERGSTRESSER
Massachusetts Institute of Technology (MIT)
Department of Economics
MIHIR A. DESAI
Harvard University
Finance Unit
National Bureau of Economic Research (NBER)
JOSHUA RAUH
Massachusetts Institute of Technology (MIT)
Department of Economics
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=557084
Paper ID: EFA 2004 Maastricht Meetings Paper No. 4245
Date: January 2004
Contact: DANIEL B. BERGSTRESSER
Email: Mailto:dberg@mit.edu
Postal: Massachusetts Institute of Technology (MIT)
Department of Economics
50 Memorial Drive
Cambridge, MA 02142 UNITED STATES
Co-Auth: MIHIR A. DESAI
Email: Mailto:mdesai@hbs.edu
Postal: Harvard University
Finance Unit
Boston, MA 02163 UNITED STATES
Co-Auth: JOSHUA RAUH
Email: Mailto:rauh@mit.edu
Postal: Massachusetts Institute of Technology (MIT)
Department of Economics
50 Memorial Drive
Cambridge, MA 02142 UNITED STATES
ABSTRACT:
Managers manipulate firm earnings when they characterize pension
assets to capital markets and alter investment decisions to
justify, and capitalize on, these manipulations. We construct a
measure of the sensitivity of reported earnings to the assumed
long-term rate of return on pension assets. This sensitivity is
an important determinant of the rate of return assumption,
implying that managers are more aggressive when their
assumptions have a greater impact on reported earnings. Managers
also increase assumed rates of return as they prepare to acquire
other firms and as they exercise large amounts of stock options,
further confirming the opportunistic nature of these increases.
Decisions about assumed rates of return, in turn, influence
asset allocation within pension plans. Instrumental variables
results suggest that a 25 basis point opportunistic increase in
the assumed rate of return is associated with a 5% increase in
equity allocation. Taken together, these results suggest that
earnings manipulation arising from managerial motivations
influences other managerial investment decisions in important
ways.
JEL Classification: M41, M52, G23, G30, G11
______________________________
"The Cult of the Equity for Pension Funds: Should it Get the
Boot?"
BY: CHARLES M. SUTCLIFFE
University of Southampton
School of Management
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=544862
Paper ID: University of Southampton Accounting and Finance
Discussion Paper No. AF04-17
Date: April 2004
Contact: CHARLES M. SUTCLIFFE
Email: Mailto:CMS@MAIL.SOTON.AC.UK
Postal: University of Southampton
School of Management
Highfield
Southampton S017 1BJ, UNITED KINGDOM
Phone: (+44) 01703 593966
Fax: (+44) 01703 593844
ABSTRACT:
Over the last half century UK defined benefit pension schemes
have followed the cult of the equity by investing a large
proportion of their assets in equities. However, since the turn
of the millennium this cult has faced two serious challenges -
the halving of equity prices, and the complete rejection of
equity investment by the Boots pension scheme. This paper
summarises the history of the cult in the UK and the arguments
advanced at the time to support its adoption. It then presents
the case for the cult (excluding taxation, risk sharing and
default insurance). This is followed by a detailed consideration
of the validity of this case, including an examination of the
relevant empirical evidence. It is concluded that, in the
absence of taxation, risk sharing and default insurance, the
asset allocation is indeterminate; and depends on the
risk-return preferences of the trustees and employer.