Pension Overhang and Corporate Investment

We exploit an exogenous, universal increase (decrease) in discount rates (pension liability)
mandated by the Moving Ahead for Progress in the 21st Century Act (MAP-21) to identify
the impact of pension overhang on investment. We find that firms with large unfunded
pension liabilities increase investment by 13% after the MAP-21 induced decrease in pension
liabilities. The effects are more pronounced for ex ante financially constrained firms, while
pension-related cash flows have a minimal impact on the affected firms’ investment policy.
The reduction in pension liabilities is associated with favorable credit rating changes. Our
results are consistent with, and incremental to, the effects of existing measures of debt
overhang on investment.