Pension Risk and Corporate Investment Decisions: Evidence from Korean Listed Firms*

This study examines the effect of pension risk on corporate investment decisions, using panel data from Korean listed firms with defined benefit pension (DB) plans over the period 2013-2024. We measure pension risk using the market betas of firms' pension assets and liabilities. Our empirical analysis shows that although the average pension risk among DB plan firms is negative, its relationship with operational asset beta is asymmetrical, conditional on the level of pension liability risk. Furthermore, we reveal that pension risk has a significant positive relationship with corporate investment, indicating that firms with higher pension risk are prone to overinvestment, characterized by the undertaking of negative-NPV projects. This interpretation is reinforced by the finding that cost of capital tends to be underestimated in firms with elevated pension risk. Lastly, we find a positive relationship between pension risk and real investment in small, highly underfunded firms, providing evidence consistent with the risk-shifting hypothesis. This suggests that such firms may increase investment risk at the expense of pension beneficiaries.