Pension Deficits and Corporate Dividend Policy

Prior studies report that firms with pension deficits pay lower dividends. We study potential channels for the lower dividends and find that they stem from a lower likelihood of dividend increases and deeper dividend cuts, but not from a higher probability of cutting dividends or smaller dividend increases. These findings are consistent with deficit firms using dividend policies that shareholders dislike the least to restrain dividends, resisting the temptation to cut dividends and avoiding hostile market reactions. Overall, firms are discreet in restricting dividends when confronted with pension funding difficulties.