The cash flows of growth stocks are particularly sensitive to temporary movements in aggregate stock prices, driven by shocks to market discount rates, while the cash flows of value stocks are particularly sensitive to permanent movements, driven by shocks to aggregate cash flows. Thus, the high betas of growth (value) stocks with the market's discount-rate (cash-flow) shocks are determined by the cash-flow fundamentals of growth and value companies. Growth stocks are not merely “glamour stocks” whose systematic risks are purely driven by investor sentiment. More generally, the systematic risks of individual stocks with similar accounting characteristics are primarily driven by the systematic risks of their fundamentals.

[The cash flows of growth stocks are particularly sensitive to temporary movements in aggregate stock prices, driven by shocks to market discount rates, while the cash flows of value stocks are particularly sensitive to permanent movements, driven by shocks to aggregate cash flows. Thus, the high betas of growth (value) stocks with the market's discount-rate (cash-flow) shocks are determined by the cash-flow fundamentals of growth and value companies. Growth stocks are not merely "glamour stocks" whose systematic risks are purely driven by investor sentiment. More generally, the systematic risks of individual stocks with similar accounting characteristics are primarily driven by the systematic risks of their fundamentals.]

We investigate the equity valuation effects of the Pension Protection Act of 2006 (PPA 2006). The PPA 2006 has two main provisions: (1) firms must fully fund their pension plans within seven years (previously allowed 30 years to fund 90 percent of the pension liability) and (2) firms receive a tax deduction for contributions up to 150 percent of the pension liability (previously 100 percent). After controlling for the effects of SFAS 158, growth opportunities, the cost of external funds, and other information released during our sample period, we examine pension firms’ abnormal returns surrounding key dates in the legislative process leading to the adoption of the PPA 2006. First, we find a mean negative abnormal return of −4.20 percent during the period in which the PPA 2006 was first voted on by Congress. The mean (median) firm in our sample experienced a $310 million ($60 million) decline in market capitalization. Second, we find that the valuation effect was more negative for firms with larger unfunded pension liabilities and larger capital expenditure requirements, while firms with higher marginal tax rates experienced a positive effect. Third, we find no evidence of differential valuation effects for firms in different “at risk” categories as defined by the PPA 2006. Finally, we find a significant number of pension freezes occurred during our sample period. Our results are stronger when excluding these firms from our sample.

Les auteurs étudient les répercussions de la Pension Protection Act de 2006 (PPA 2006) sur la valeur boursière des actions. La PPA 2006 contient deux dispositions principales : 1) les entreprises doivent assurer la capitalisation intégrale de leur régime de retraite en sept ans (alors qu’une période de trente ans leur était auparavant accordée pour capitaliser 90 pour cent de leur passif au titre du régime) et 2) elles peuvent se prévaloir d’une déduction fiscale à l’égard des cotisations à concurrence de 150 pour cent du passif au titre du régime (alors que le plafond de la déduction était antérieurement de 100 pour cent). Une fois contrôlés l’incidence de la norme SFAS 158, les possibilités de croissance, le coût du financement externe et les autres informations publiées au cours de la période d’échantillonnage, les auteurs examinent les rendements anormaux des entreprises ayant un régime de retraite, à proximité des dates marquantes du processus législatif ayant menéà l’adoption de la PPA 2006. Premièrement, ils observent un rendement anormal moyen négatif de – 4,20 pour la période au cours de laquelle la PPA 2006 a fait l’objet d’un premier vote au Congrès. La capitalisation boursière de l’entreprise moyenne (médiane) de l’échantillon a enregistré un déclin de 310 millions de dollars (60 millions de dollars). Deuxièmement, les auteurs constatent que les répercussions sur la valeur boursière sont plus négatives dans le cas des entreprises présentant des passifs non capitalisés plus importants au titre du régime et devant faire face à des dépenses en immobilisations plus substantielles, alors que les entreprises dont les taux d’imposition marginaux sont plus élevés enregistrent des répercussions positives. Troisièmement, les auteurs ne relèvent aucun élément permettant d’affirmer que les répercussions sur la valeur boursière varient selon les différentes catégories de risque définies par la PPA 2006. Enfin, ils recensent un nombre appréciable de cas de blocage du régime au cours de la période soumise à l’étude. Les résultats sont plus marqués encore lorsque ces entreprises sont retirées de l’échantillon.

We investigate the equity valuation effects of the Pension Protection Act of 2006 (hereafter PPA 2006). The PPA 2006 has two main provisions: (1) firms must fully fund their pension plans within seven years (previously allowed 30 years to fund 90 percent of the pension liability), and (2) firms receive a tax deduction for contributions up to 150 percent of the pension liability (previously 100 percent). After controlling for the effects of SFAS 158, growth opportunities, the cost of external funds and other information released during our sample period, we examine pension firms' abnormal returns surrounding key dates in the legislative process leading to the adoption of the PPA 2006. First, we find a mean negative abnormal return of -4.20 percent during the period in which the PPA 2006 was first voted on by Congress. The mean (median) firm in our sample experienced a $310 million ($60 million) decline in market capitalization. Second, we find that the valuation effect was more negative for firms with larger unfunded pension liabilities and larger capital expenditure requirements, while firms with higher marginal tax rates experienced a positive effect. Third, we find no evidence of differential valuation effects for firms in different at risk categories as defined by the PPA 2006. Finally, we find a significant number of pension freezes occurred during our sample period. Our results are stronger when excluding these firms from our sample.

Over the period 1975 to 2005, the U.S. dollar (particularly in relation to the Canadian dollar), the euro, and the Swiss franc (particularly in the second half of the period) moved against world equity markets. Thus, these currencies should be attractive to risk‐minimizing global equity investors despite their low average returns. The risk‐minimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the U.S. dollar. There is little evidence that risk‐minimizing investors should adjust their currency positions in response to movements in interest differentials.