Pension plan funding and market value of the firm: the Portuguese case

Abstract

PurposeThe objective of the paper is to test the existence of a direct effect between the funding level of a firm's pension fund and its respective market price in Portugal, from 2010 to 2015, using a selected sample of Portuguese Stock Index (PSI Geral) firms. Although this relationship has been contemplated in the literature, especially in the United States and the United Kingdom, there is no finding concerning Portugal. The study of pension assets and obligations is of particular importance to investors and market makers alike.Design/methodology/approachThe paper utilizes two distinct methods – a cross-sectional model and a variable-effect event study – to assess the hypothesis that an increase in pension deficit is reflected in the market value of a firm by a decrease of equal magnitude.FindingsThis paper finds that a firm's market value is not reduced by an increase in pension deficit and that pension liabilities are already integrated in corporate debt. These results suggest that shareholders fail to take into account occupational pension plan funding status when valuing a firm in such a way that contrasts with the normal evaluation of debt.Originality/valueTo the best of the authors' knowledge, this is the first attempt to examine this relationship in Portugal.