Pension Fund Deficits and Stock Market Efficiency: Evidence from the United Kingdom

This paper examines the effect of a company’s unfunded pension liabilities on its stock market valuation. Using a sample of UK FTSE350 firms with defined benefit pension schemes, we find that although unfunded pension liabilities reduce the market value of the firm, the coefficient estimates indicate a less than one-for-one effect. Moreover, there is no evidence of significantly negative subsequent abnormal returns for highly underfunded schemes. These results suggests that shareholders do take into consideration the unfunded pension liabilities when valuing the firm, but do not fully incorporate all available information.