Corporate risk management and pension investment policy. Issue 4 (August 2022)

• Record Type: Journal Article
• Authors: Li, Yong; Henry, Darren
• Is Part Of: European management journal. Volume 40:Issue 4(2022)
• Page Start: 590
• Page End: 605
• Publication Date: 2022-08
• Subjects: Pension risk -- Fair-value -- Pension reporting -- Corporate risk management; M41 -- J53; Management -- Periodicals; Management -- Europe -- Periodicals; Gestion -- Périodiques; Gestion -- Europe -- Périodiques; Management; Europe; Periodicals; Electronic journals; 658.0094
• DOI: 10.1016/j.emj.2021.09.003
• Languages: English
• ISSNs: 0263-2373

Abstract

Abstract: In this paper, we study whether firms manage their pension risk exposures within an integrated corporate risk management framework or they manage their pension and firm risk exposures independently following the adoption of fair value pension reporting regulation (IAS 19). Controlling for known factors affecting the risk-taking in pension plan investments, we document a robust negative association both at the cross-section and over time between pension risk and firm systematic risk and operating asset risk during the post-IAS 19 adoption period. The findings suggest that firms manage pension risk as an integral part of firm risk, consistent with a coordinated risk management explanation. Overall, our evidence highlights that pension investment strategy is a dynamic process that is ultimately determined by sponsoring firms' strategic corporate risk management considerations and the important role that changing pension reporting regulation plays in shaping these dynamics. Our conclusions have potential wider implications for ongoing reforms in financial reporting and disclosure policy settings. Highlights: The paper examines whether firms manage their pension risks independent of their underlying firm risk exposures. We propose coordinated risk management and separated risk management arguments for pension risk decision-making. We show a robust negative association at the cross-section and over time between pension risk and both firm systematic risk and operating asset risk following the adoption of IAS 19. Revised IAS 19 (IAS 19R) effective from 2013 constrains the strength of the substitution effect between pension and firm risk exposures. Changing financial reporting regulation plays an important role in shaping the dynamics of corporate and pension risk management policies.