The Effect of Internal Capital Shocks on Manager Behavior: Evidence from Changes in ERISA Pension Accounting Rules

Academics, trade groups, and pension plan sponsors argue that pension obligations constrict investment and lead to economic inefficiencies. Exploiting a 2012 change in the ERISA pension accounting rules that decreased mandatory pension contributions, my results suggest that recipients of pension funding relief increase shareholder payouts. Shareholder payouts comprise 15 to 21 percent of the pension funding relief subsequent to the accounting rule change. I find mixed evidence that the cash flows from the reduction of mandatory contributions under MAP-21 have an immediate effect on investment. The investment effect is concentrated in firms with the highest investment opportunity sets and firms that can more easily reverse investment if the temporary pension rule change reverts. In addition, recipients of pension funding relief retain more cash after the rule change. This effect is strongest for firms with higher cash flow uncertainty and for firms without credit ratings, consistent with managers retaining cash in anticipation of future financing needs. The association between shareholder payouts and pension obligations is robust to utilizing alternative ERISA accounting rule changes that predicated the 2012 rule change.