Capital structure decisions and corporate pension plans’. Working paper

This paper examines the capital structure puzzle that many firms appear to be underlevered from a tax savings perspective. More specifically, this paper explores the capital structure implications of sponsoring corporate pension plans and finds that firms are significantly less underlevered once off balance sheet pension obligations are taken into account. I treat corporate pension plans as fully owned subsidiaries and I find that sponsoring companies are 35 % more levered on consolidated accounts. I also calculate marginal tax rates by explicitly accounting for the effect of pension contributions on taxable income and I find that the tax benefits of debt-like deductions are 47% larger once pension debt is included as a long term liability. Overall, I estimate that the underleverage gap closes by 31 % due to pension deductions. Additionally, I provide evidence that sponsoring companies use less debt on average than do comparable, non-sponsoring companies