Do Corporates Set Pension Discount Rates Strategically?

Abstract

Over 85% U.S. firms set their pension discount rates higher than benchmark rates, particularly when interest rates fall. This paper offers explanations to this phenomenon --- mandatory contributions to underfunded pensions constrain corporate investments, thus a relaxation of such constraint through setting higher pension discount rates helps to improve firm value. Consistent with this view, we find higher discount rate helps improve the performance of underfunded firms. Within firms in the most underfunding decile group, a one standard deviation increase of pension discount rates leads to a 0.2\% improvement in monthly stock performance.