HOW CORPORATE PENSIONS AFFECT STOCK RETURNS: THE ROLE OF R&D EXPENDITURES

We examine the stock return implications of corporate-de¯ned bene¯t pension plans in innovative U.S. ¯rms and in R&D- and patent-sorted portfolio speci¯cations. We ¯nd that investors underreact to ¯rms increasing o®-balance-sheet liabilities. Pensions represent material o®-balance- sheet liabilities: in our extensive and large sample (1985–2017, 2541 ¯rms for 26,522 observations), entities with pension plans are 38% more levered when we integrate pension liabilities and assets into the ¯rms' capital structure. We ¯nd that R&D-intensive ¯rms increasing the size of their pension liability subsequently underperform their benchmark returns. Through six alternative R&D-market capitalization portfolios, we also ¯nd that this association is stronger for smaller ¯rms. Finally, the relationship remains persistent over a long horizon. These ¯ndings are robust to endogeneity concerns addressed through instrumental variables, propensity score matching, and Heckman correction.