O'Reilly logo

Strategic Corporate Finance: Applications in Valuation and Capital Structure by Justin Pettit

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

WHY IT STILL HASN’T HAPPENED

Despite overwhelming economic evidence to the contrary, corporate pensions continue to be largely invested in equities. We identify six factors that contribute to the ongoing preference among corporate pensions to allocate the bulk of their assets to equities despite the weak economic rationale:

1. Bull Market. The experience of multiple consecutive years of large excess returns in the equity market made the lure of equity risk difficult to resist.25 Many companies were able to significantly boost their reported earnings in a period when underlying operating performance was showing signs of weakness. The market correction and its aftermath have helped bring a more realistic perspective. Recent interest rate movements make any switch to bonds cheaper.

2. Rating Agencies. Though change is underway at the agencies, historically the credit ratings process has not explicitly incorporated asset allocation or its financial consequences in the determination of credit quality. Though the Boots case has raised the practical issues, many more cases will be required to effect the change required.

3. GAAP. A biased and opaque method of accounting for pensions that highlights the rewards of equity while hiding its risks (and provides opportunity for gaming) remains a critical element of support for equity investment despite the economics.26 The globalization of accounting standards and momentum for other politically charged changes suggests that change may be on ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required