Corporate pension liabilities and risk of stocks - leverage and cross-holding.

The paper deals with corporate defined benefit pension plans and their effects on the risk of stocks. Within the assets of defined benefit pension plans, the ratio of stocks is usually high, while the benefits do not depend on the investment performance of the fund's assets. So through an increase of leverage and through a cross-holding effect (since the funds largely invest in the stocks of other sponsors), the performance of the pension fund's assets influences the value and risk of the stocks of the sponsoring company. The importance of this phenomenon became apparent due to the market trends in the first years of the new millennium, when falling interest rates appreciated the value of pension liabilities, while pension assets were hit by the poor performance of the stock market. It is demonstrated here in a CAPM-based model that the leverage and the cross-holding effect due to un-immunized benefit obligations of corporate defined-benefit pension plans may increase the volatility of the stock market, and may change the systematic risk of stocks and the proportion of the individual, non-diversifiable part within the total variance