Author : Kunal Rawal
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (899 download)
Book Synopsis The Influence of Defined Benefit Plans on Equity Risks and Prices by : Kunal Rawal
Download or read book The Influence of Defined Benefit Plans on Equity Risks and Prices written by Kunal Rawal and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines whether the systematic equity risk of German companies, measured by beta from Capital Asset Pricing Model (CAPM), reflects the risk of defined benefit pension plans sponsored by the companies. The possible reasons why pension risk does not get incorporated into company valuations could be low disclosure norms, off balance sheet reporting of pension liabilities and opaque set of accounting rules that govern these issues. In the aftermath of an era of low interest rates and declining returns on equity markets, the pension plans deficit have soared due to increase in liability on one hand and lower valuation of pension assets on the other. Pension plan deficits can be detrimental to company's financial health thereby, impacting its equity valuation and credit ratings, jeopardizing its very existence. This paper also highlights the implication of pension plan on capital budgeting decision making process. As it turns out, ignoring the value as well as risk of pension plans can push up the cost of capital which feeds into discount rates used to estimate projects net present value. This paper advices on the changes that need to be made to standard procedure of WACC calculation to accommodate pension plan and take an integrated approach towards corporate finance decision making process. The empirical finding also highlights the direct relationship between firm risk and pension risk, although the results were curtailed due to unavailability of large cross sectional and panel data.