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Underfunding in Defined Benefit Pension Plans and Firms’ Contribution Behavior by: Youngkyun Park

Underfunding in Defined Benefit Pension Plans and Firms’ Contribution Behavior by: Youngkyun Park. Discussant: Cassandra R. Cole Florida State University ARIA 2007. Background and Research Question. Methods of funding pension obligations Factors affecting decision to use external financing

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Underfunding in Defined Benefit Pension Plans and Firms’ Contribution Behavior by: Youngkyun Park

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  1. Underfunding in Defined Benefit Pension Plans and Firms’ Contribution Behaviorby: Youngkyun Park Discussant: Cassandra R. Cole Florida State University ARIA 2007

  2. Background and Research Question • Methods of funding pension obligations • Factors affecting decision to use external financing • The question is: “At what funding levels are firms likely to use debt financing to fund pension obligations?”

  3. Motivation • Adverse market conditions • Decline in pension funding • Change in pension rules

  4. Analysis • Debt financing for pension contributions and expected net benefit of liability relocation • Pension contributions and capital expenditures

  5. Results • Contributions are positively related to change in LTD at low funding levels • Employer contributions are negatively related to capital expenditures for low funding levels

  6. Items to Consider • Focus analysis on individual quartiles and movement from FLt-1 and FLt • Additional analysis of firms with multiple plans in which some are underfunded and others are not • Re-examine models for possible econometric issues with 1Q, 2Q, 3Q, 4Q, and OF vs combined models • Additional analysis of firms that report combined US and non-US plans

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