Do Firms’ Pension Contributions Decrease Their Investments in Korean-listed Firms?

This study analyzed the effect of pension contribution underfunding on corporate investment for Korea Exchange-listed firms over the sample period of 2013~2022. The firms were classified into defined benefit (DB) plans and defined contribution (DC) plans according to the pension system they operated, construct annual pension contribution underfunding data for each firm. The key findings are as follows. First, in DB plans, annual underfunding was generally negatively related to new investment; however, this relationship was asymmetric depending on the level of underfunding. Specifically, firms with low underfunding showed a significant tendency to invest less, while those with high underfunding significantly overinvested. Second, this asymmetry was particularly pronounced among firms listed on the KOSPI market and the results of controlling for financing constraints showed that overinvestment in the high-underfunding group predominantly occurred in small and financially distressed firms. This suggests that overinvestment in these firms may be attributable to the risk-shifting hypothesis identified in prior studies. Lastly, the asymmetrical results identified in the DB plan sample were confirmed in the DC plan sample.