Pension expenses, risk, and implications for stock returns

Abstract

As life expectancy rises, firms' pension expenses for employees rise as well. This study shows that from around the beginning of the current millennium, US firms' annual mean expenditure on their employee pensions has increased substantially. This expense has become a burden on firms and presents a risk for their activity, which is not diversifiable. An increase in the newly suggested measure causes an increase in the average cross-sectional stock returns. This effect is both statistically and economically significant. Moreover, the effect is sustainable for a variety of robustness tests, both in-sample and out-of-sample.