Pension Policy and the Value of Corporate-Level Investment

We examine how pension policy affects the value of corporate-level investment to the firm and its various claimants using Monte Carlo simulation. Shareholders lose the greatest amount of project value to the pension plan when it is undiversified across asset classes. Improved funding levels mandated by the provisions of the Pension Protection Act of 2006 generally reduce those wealth transfers. Thus, mitigation of the overhang effect joins the reduction of financial distress costs as a motivation for holding both stocks and bonds in the pension fund.