This paper examines the implications of the joint effects of insurance and taxes for the optimal corporate pension strategy. It is shown that neither the “mini‐max” nor the “maxi‐min” strategy advocated by previous authors is necessarily best in corporate pension management. In the presence of capital market imperfections, the analysis via a single‐period contingent‐claims model indicates that optimal corporate pension strategy in both asset‐allocation and funding decisions can be a noncorner interior solution.

Capital market data are used to investigate the termination announcement effect of over‐ and underfunded corporate pension plans. Significant positive abnormal returns are initially observed for samples of both over‐ and underfunded plan terminations; however, after segmenting the samples on the basis of publicly available information regarding a firm's financial condition, significant returns are observed only for financially distressed subsamples. The evidence suggests that the property rights to pension fund assets and liabilities reside fully with the sponsoring firm, and that financially distressed firms may effect a wealth transfer to shareholders by fund termination. Résumé. Les auteurs utilisent les données relatives au marché financier pour analyser l'incidence des avis de discontinuation de régimes de retraite surcapitalisés et sous‐capitalisés de sociétés. Des rendements positifs irréguliers importants sont d'abord observés pour des échantillons de cas de discontinuation de régimes surcapitalisés ainsi que sous‐capitalisés; toutefois, après une segmentation des échantillons à partir de l'information mise à la disposition du public concernant la situation financière de la société, des rendements importants sont observés seulement pour les sous‐échantillons de sociétés en difficulté financière. Les résultats donnent à penser que les éléments d'actif et de passif de la caisse de retraite échoient entièrement à la société promotrice et que les sociétés en difficulté financière peuvent procéder à un transfert de richesses au profit des actionnaires par voie de discontinuation du régime.

This study applies an option pricing model to empirically derive pension put values for a sample of 176 individual pension plan sponsors insured by the Pension Benefit Guaranty Corporation (PBGC). This study finds that the pension put values for a group of 22 underfunded sponsors were significantly greater than the insurance premiums paid to the PBGC. On the other hand, for a group of 154 overfunded sponsors, the put values were also greater than the pension premiums paid to the PBGC, although the difference was not statistically significant. These findings suggest that underfunded plan sponsors are significantly undercharged by the PBGC, while overfunded plan sponsors are approximately fairly charged.

In this paper, the portfolio and the liquidity planning problems are unified and analyzed in one model. Stochastic cash demands have a significant impact on both the composition of an individual's optimal portfolio and the pricing of capital assets in market equilibrium. The derived capital asset pricing model with cash demands and liquidation costs shows that both the market price of risk and the systematic risk of an asset are affected by the aggregate cash demands and liquidity risk. The modified model does not require that all investors hold an identical risky portfolio as implied by the Sharpe-Lintner-Mossin model. Furthermore, it provides a possible explanation for the noted discrepancies between the empirical evidence and the prediction of the traditional capital asset pricing model.