Shareholder response to pension deficit: evidence from the COVID-19 pandemic

We examine the impact of firms’ pre-crisis pension underfunding on stock returns of US firms during the COVID-19 stock market crisis. Unlike the prior studies, our study uses the COVID-19 pandemic as an exogenous shock to pension underfunding and reports that shareholders remain indifferent to firms’ pension underfunding. The impact of pension underfunding remains trivial even after considering firms’ possible financial constraints, information asymmetry, and mandatory contributions associated with the underfunding. Our findings suggest that shareholders acknowledge pension deficit as a firm’s true liability only when pension underfunding contributions start affecting earnings and cash flows in the future.