Financial Flexibility and Tax Incentives: Evidence from Defined Benefit Corporate Pension Plans in Japan

Geneva Papers on Risk and Insurance - Issues and Practice Vol. 38 (4): 753-776, 2013

Posted: 15 Feb 2015 Last revised: 3 Sep 2017

See all articles by Shingo Goto

Shingo Goto

University of Rhode Island - College of Business Administration

Noriyoshi Yanase

Keio University - Faculty of Business and Commerce

Date Written: June 14, 2013

Abstract

Contrary to the objective of a major corporate pension reform in Japan to enhance retirement income security, and despite the increased relative tax benefits of externally-funded plans, the number of firms that do not sponsor externally-funded defined benefit plans or defined contribution plans has been increasing steadily. We study the common characteristics of firms sponsoring only traditional internally-funded lump sum plans that provide only weak protection of the employees’ retirement benefits. We find that smaller firms with higher growth prospects (price-to-book ratios) and a younger workforce are less likely to adopt externally-funded plans and more likely to terminate them when they have one. Firms sponsoring only internally-funded plans tend to exhibit lower profitability than their peers with otherwise similar characteristics. These results suggest that smaller firms with higher growth prospects and a younger workforce tend to have stronger incentives to ensure financial flexibility by providing only weak protection of their employees’ retirement benefits.

Keywords: retirement benefits; Japanese firms; financial flexibility; tax incentives; corporate pension plans; internally-funded lump sum plans

JEL Classification: G22, G23, G32

Suggested Citation

Goto, Shingo and Yanase, Noriyoshi, Financial Flexibility and Tax Incentives: Evidence from Defined Benefit Corporate Pension Plans in Japan (June 14, 2013). Geneva Papers on Risk and Insurance - Issues and Practice Vol. 38 (4): 753-776, 2013, Available at SSRN: https://ssrn.com/abstract=2564771

Shingo Goto

University of Rhode Island - College of Business Administration ( email )

Kingston, RI 02881
United States
4018744318 (Phone)
4018744312 (Fax)

Noriyoshi Yanase (Contact Author)

Keio University - Faculty of Business and Commerce ( email )

2-15-45 Mita
Minato-ku
Tokyo 108-8345
Japan
1088345 (Fax)

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