Abstract
We derive the optimal corporate pension portfolio policy in a consolidated setting in the presence of PBGC insurance. The paper's result formalizes the forces of risk shifting and risk management that shape the form of the corporate pension portfolio. As in Rauh (2009), the risk-shifting and risk-management incentives increase when a sponsoring company runs into financial trouble. Unlike Rauh (2009), we show that risk management must not constitute a force countering risk shifting. On the contrary, for a company registering serious financial problems, the strategies driven by risk-shifting and risk-management motives are both extreme.
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