| Description |
A multiemployer defined pension plan (MDBP) is a collectively bargained pension plan maintained by two or more employers and a labor union. MDBPs pool risks, contributions, assets, and liabilities. Bankruptcy by MDBP firms usually results in almost constant MDBP total liabilities but a shrinking pool of contributing MDBP employers, thus increasing MDBP liabilities for the remaining MDBP employers and exposing them to "liability spillover risks." I document the economic magnitudes of public firms' MDBP liabilities and MDBP liability spillovers from other public companies, information relevant to both finance academics and policy makers. I find five companies with 5-year expected MDBP liability spillovers exceeding 1% of their book assets. One company has 1-year expected MDBP liability spillovers exceeding 22% of its book assets. On average, leverage ratios increase by 6% once MDBP liabilities and expected liability spillovers are consolidated into capital structure. I investigate empirically whether the risk associated with MDBP membership is systematic and is priced. I propose that MDBP sharing companies share four common risks: MDBP liability spillover risks, MDBP unfunded liability risks, labor contract risks, and geographic area risks. To test for common effects on stock returns, I regress public MDBP firms' stock returns on known risk factors and extract the residuals and then regress the residuals against an equally weighted index of stock returns of companies with whom the firm shares MDBPs. I find that MDBP sharing companies' stock returns display positive statistically significant excess co-movement. Using an equally weighted MDBP index, I find statistical evidence to suggest that MDBP sharing firm's co-movement changes after the public release of information about which firms share MDBPs. |
