Do Firms Shift Risk to Employees in Uncertain Times? Evidence from Corporate Pension Plans

We investigate whether firms risk-shift via corporate pension plans in response to distress risk induced through economic policy uncertainty (EPU). Using a sample of US-listed firms, we find that firms increase pension underfunding levels when facing higher EPU. Cross-sectional analysis shows that the effect is stronger for firms having CEO being excessively paid, using cash flow as an important metric in CEO compensation, paying high dividends, and in EPU-sensitive industries. In contrast, the presences of unions, long-term institutional investors, positive corporate culture, and social capital alleviate the effect. Our baseline result is robust to controlling for other macroeconomic factors, the instrumental variable estimation, and alternative measurements of pension risk-shifting. Overall, our findings suggest that EPU stimulates firms to shift risk to employees and aggravates stakeholder conflicts.