COST OF EQUITY CAPITAL AND UNDERSTATED PENSION LIABILITIES

  • Bob Webb University of Virginia
  • Huan Yang Southwestern University of Finance and Economics
  • Jun Cai City University of Hong Kong
  • Lin Huang Southwestern University of Finance and Economics

Abstract

Pension discount rates have a powerful effect on the size of reported defined benefit corporate pension liabilities because of the long-term nature of projected benefit obligations. Firms often choose pension discount rates that are above the guideline long-term Treasury, AAA-grade, and AA-grade corporate bond yields. We assess the sizes of understated pension liabilities relative to these benchmark interest rates and relate them to individual firms’ implied cost of equity. We find that firms with large understated pension liabilities have a higher implied cost of equity after taking into account standard control variables and other pension information such as funded status and mandatory contributions.

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Author Biographies

Huan Yang, Southwestern University of Finance and Economics

Research Institute of Economics and Management

Jun Cai, City University of Hong Kong

Department of Economics and Finance

Lin Huang, Southwestern University of Finance and Economics

Research Institute of Economics and Management

Published
2022-02-14
How to Cite
Webb, B., Yang, H., Cai, J., & Huang, L. (2022). COST OF EQUITY CAPITAL AND UNDERSTATED PENSION LIABILITIES. Applied Finance Letters, 10, 160 - 180. https://doi.org/10.24135/afl.v10i.491
Section
Articles submitted to regular issue