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Capital structure choices, pension fund allocation decisions and the rational pricing of liability streams

Published online by Cambridge University Press:  18 February 2021

Lionel Martellini  and
Vincent Milhau
Lionel Martellini
Affiliation:
EDHEC-Risk Institute, EDHEC Business School, Nice, France
Vincent Milhau*
Affiliation:
EDHEC-Risk Institute, EDHEC Business School, Nice, France
*
*Corresponding author. Email: vincent.milhau@edhec.edu
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Abstract

This paper introduces an integrated asset-liability management model that allows for the joint quantitative analysis of capital structure choices, pension fund allocation decisions and rational pricing of liabilities. We confirm that capital structure decisions have a substantial impact on the value of pension claims, and we provide a quantitative assessment of the mispricing induced by the use of an arbitrary regulatory discount rate. We also present a quantitative assessment of the asset substitution effect implied by a change in the pension fund allocation to risky assets taking place after the corporate and pension obligation claims have been issued.

Keywords

asset-liability managementcapital structurecorporate pension plandefault risk

JEL classification

G32: Financing Policy • Financial Risk and Risk Management • Capital and Ownership Structure • Value of Firms • Goodwill J32: Nonwage Labor Costs and Benefits • Retirement Plans • Private Pensions
Type
Article
Information
Journal of Pension Economics & Finance , Volume 21 , Issue 3 , July 2022 , pp. 425 - 445
Copyright
Copyright © The Author(s), 2021. Published by Cambridge University Press

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