The Effect of Defined Benefit Pension Plans on the American Steel Industry

Abstract

This study analyzes 42 American steel industry firms between the years 2006-2015. Analysis relating the information content of accounting earnings to stock prices for the full sample indicates that there is significant positive correlation between earnings and stock price for the firms in total. When the sample is portioned between firms that contain underfunded pension plans and firms that do not, the underfunded plan firms’ earnings are not significantly related to stock price. Those firms with pension plans not underfunded are significantly related to stock price, and are positive in their correlation.

The firms are then assessed against the DJIA 30 firms during the test period. Findings show greater positive correlation between earnings and stock prices for the DJIA firms. When a subsample comparing underfunded firms in each group are assessed, samples from both groups show a reduced correlation and DJIA firms are still positive and significant in correlation, but the steel industry firms show no significance at conventional levels. A subsample of firms from each group with pension plans not underfunded are then analyzed. Both groups are significant and positive in correlation between earnings and stock price, but the DJIA firms still possess an edge in information content.