FUNDING STATUS OF DEFINED BENEFIT PENSION PLANS AND IDIOSYNCRATIC RETURN VOLATILITY

In this article, I explore how the funding status of a sponsoring firm's defined benefit pension plans affects its idiosyncratic volatility. Using a large sample of U.S. firms from 1980 to 2010, I document a positive and significant relation between pension deficits and idiosyncratic volatility. The relation is stronger for firms that are financially constrained and that have a worse information environment. The findings are consistent with the argument that large pension deficits generate greater risk for the firm's future operations and financing, and deteriorate its financial disclosure quality, which raises firm idiosyncratic volatility.