Accounting Recognition and the Determinants of Pension Asset Allocation

We identify and test motives for corporate pension asset allocations using a proprietary asset allocation database covering the 1988–1994 period. We focus on the question of whether the recognition of additional minimum pension liability in accordance with SFAS No. 87 affects asset allocation. Our results are consistent with the claim that companies allocate their pension assets to avoid the recognition of an additional minimum liability. In particular, companies that are close to the recognition threshold prefer fixed-income investments rather than equity investments. By investing in fixed-income securities, firms increase the correlation between pension assets and liabilities, reducing the likelihood of a pension deficit. Our results also suggest that firms allocate their pension assets between equities and fixed-income investments to reduce the volatility of pension contributions. Finally, we find that larger firms and firms with a young workforce invest more in equity securities than in fixed-income securities.