Discussion Papers In Economics
And BusinessJAPANESE CORPORATE PENSION PLANS
AND THE IMPACT ON STOCK PRICES
Kazuo YOSHIDA
Yutaka HORIBA

Discussion Paper 02-11

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANJAPANESE CORPORATE PENSION PLANS
AND THE IMPACT ON STOCK PRICES
Kazuo YOSHIDA
Yutaka HORIBA

Discussion Paper 02-11

July 2002

この研究は「大学院経済学研究科・経済学部記念事業」
基金より援助を受けた、記して感謝する。

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANJAPANESE CORPORATE PENSION PLANS
AND THE IMPACT ON STOCK PRICES*

Kazuo YOSHIDA
Nagoya City University
Yutaka HORIBA

Osaka University
July 2002

Abstract: This study focuses on the stock market impact of Japanese corporate
decisions to adopt pension plans. Implementing corporate pension plans in Japan iscomplicated because they are heavily regulated by the government, and the traditional
lump-sum-only severance benefit plan already exists, requiring interfacing the newly
adopted plans with the existing ones. Using the GARCH estimation method, the market
model applied in this paper for the relatively long period 1975-1995 yields evidence thatsuggests that the stock market responds to some of the more specific characteristics ofadopted plans. Alternative specifications of the pension “event” also suggest that
relatively little of the market impact comes from public announcement about pension
adoption occasioned by the release of the firm’s financial statement.
JEL Classification: G23
Keywords: Japanese corporate pension*

Comments received on earlier versions of the paper from Michio Kunimura, Kozo
Nishida, and seminar participants at the Third Annual Conference of Asia Pacific Risk
and Insurance Association held at Lingnan University, Hong Kong are gratefully
acknowledged. Financial support for this research project was received from Nomura
Foundation for Social Science. All remaining shortcomings are the sole responsibility of
the authors.

INTRODUCTION
Since the publication of the American Accounting Association’s A Statement of
Basic Accounting Theory in 1966, there have been major developments in the economic
theory of accounting that emphasizes the informational content of accounting and its
impact on the financial market. An important strand of empirical research that it has
spawned, the semi-strong efficient capital market hypothesis originated by Fama (1970),
encompasses analyses of the informational content of corporate earnings, as well as thatof depreciation and other accounting methods employed by firms. For example, Ball
(1972), and Biddle and Lindahl (1982) analyze the tax consequences and stock pricereactions to the firm’s decision to adopt the LIFO inventory valuation method. Thesestudies generally support the view that the financial market effectively utilizes
accounting information, particularly as it relates to tax consequences.1
With respect to the stock market impact of corporate pensions, Feldstein and
Seligman (1981), Daley (1984), and Bulow, Morck and Summers (1987), among others,
analyze the relationship between unfunded pension liabilities and share prices, and findthat unfunded vested pension liabilities adversely affect the market valuation of the
firm. The findings are consistent with the underlying hypothesis, since an unfundedpension liability increases the firm’s future obligations at the same time that it foregoes
current corporate tax benefits associated with pension plans.2 In addition, Alderson
and Chen (1986), VanDerhei (1987), Moore and Pruitt (1990), and Alderson and
VanDerhei (1992) examine whether and how the termination of over-funded plans
impacts positively on share prices. Both the evidence and the argument regarding this2

latter linkage are more mixed. Interestingly, however, Mittelsteadt and Regier (1993)
find evidence that when over-funded defined benefit plans are terminated, share prices
tend to rise, causing a positive wealth transfer to share holders, whereas definedcontribution plans that cannot be “over-funded” have no such effect.
While the preceding studies using the U.S. data have analyzed the effect of either
unfunded or over-funded pension liabilities of firms that already have plans in place,none has analyzed the effect of corporate decisions to adopt plans in the first place. This
may not be surprising in view of the fact that corporate pension plans are fairly
widespread among American corporations, with some plans dating back to the 1920s.3
In contrast, Japanese plans have been adopted more recently, albeit in a heavily
regulated economic environment. The maintained hypothesis underlying this study isthat the adoption of pension plans by Japanese corporations (in the form of either the
tekikaku or kosei variety as explained in the following section) signals information about
expectations of future earnings, which in turn impacts positively on their share prices.
The primary incentive for a corporation to adopt a pension plan, relative to thealternative of relying solely on the traditional lump-sum payment plan, is the greatertax advantage associated with the newly adopted pension plan.

This advantage,

however, cannot be realized without sufficient corporate earnings from which the plan’s
future premium contributions will be deducted as an expense, and the adoption
decisions have this informational content about future earnings expectations. On theother hand, the cash-flow position of the firm is affected by pension decisions in a more
complex manner, depending on a) how the existing lump-sum payment obligations are3

transferred to the new plan, b) the terms of the new plan stipulating the schedule ofbenefits, and the periodic premium contributions required for the firm to maintain theplan, and c) the administrative cost of carrying the plan. We trace briefly the evolution
and the characteristics of alternative Japanese plans, and the interactions between theplans. Our focus is on the stock market response to the corporate pension initiatives, as
the transition is made from internally administered lump-sum severance plans toexternally managed explicit pension plans.

JAPANESE CORPORATE PENSION PLANS AND THEIR INCENTIVESThe Japanese pension system is fairly complex, so we briefly describe the majorplans covering private sector employment. 4 The traditional practice of retirementcompensation is based on one-time, lump-sum payments that are linked to the retiring
employee's years of employment at the firm and the salary level.

Since similar

payments at reduced rates are also made routinely to employees leaving the firm for
non-retirement reasons, including a voluntary quit, the practice may be best understoodas an implicit contract on all types of severance benefits. This long-standing practice
was institutionalized by the 1952 revision of the Corporate Tax Laws. The hikiate kin(severance reserve, or hikiate for short) system was introduced, allowing participating
firms to set up an internal reserve account on severance compensation. However, firms
are under no legal obligation to actually set aside the reserve as either cash on hand or
funds to be portfolio-managed as the firm’s severance liabilities are accumulated overtime, and most of the hikiate plans have in fact remained unfunded. Despite this, the4law allowed periodic “contributions” to the reserve account as the firm's legitimate
expense.

Hence, this tax provision has given a powerful incentive for Japanese

corporations to set up the plan, but restrictions were soon imposed on the amount of tax
deductions that can be claimed.5
A subsequent corporate tax legislation, passed in 1962, introduced a voluntary
tax-qualified pension called zeisei tekikaku nenkin (tekikaku plan for short) under theaegis of the Ministry of Finance (MOF).

This legislation grew out of increasing

concerns about the rapidly rising unfunded indemnity of most hikiate plans. In contrast
to the hikiate plan, the tekikaku plan entails the establishment of an explicit pension
plan to be managed by an outside financial contractor, either a trust bank or a life
insurance company.6 The benefit levels are defined by each plan, and once established,
the firm's periodic premium contributions as determined by the contractor, subject tothe MOF regulation and reviewed every five years, are fully tax-deductible. By the endof 1995, there were 91,465 tekikaku plans covering 10.8 million employees.7
In the meantime, revisions of the Japanese social security system made in 1965
resulted in an alternative corporate pension called kosei nenkin kikin (employee pension
funds, or kosei plan for short). The initiatives in this case were taken by the Ministry of
Health and Welfare, which became increasingly concerned about the financial health of
the national social security system that it administers. The new legislation was designed
to shift the administration (tax collection, management of collected funds, and benefit
payouts for eligible employees) of a portion of the earnings-linked old-age public
pension in the social security system to individual kosei plans that are set up by5

participating corporations. Hence, the kosei plan administers both this portion of social
security benefits and the more substantial private pension portion. In return for thepartial absorption of the public pension, the participating corporation receives a tax
rebate. However, once set up, portfolio management of the plan is by an independent
contractor subject to the same rules as the tekikaku plan, and the firm's premium
contributions to the plan are also fully tax-deductible. Because of the legal restrictionthat the qualifying plan must enroll at least 500 employees, however, the kosei plan islimited to larger firms.8 There were 1,878 kosei plans as of 1995, covering 12.1 million
employees.
The primary corporate incentives for adopting either the tekikaku or kosei plan
are the more favorable tax treatment that they both receive over the hikiate plan.9 The
adoption of either of these new plans may therefore contain useful information to thestock market: the firm expects to maintain at least sufficient earnings in the future,against which all premium contributions can be applied as an expense with resultant tax
savings.

THREE FORMS OF TRANSFER FROM THE HIKIATE PLAN
Retiring employees are typically given the option of receiving retirement benefits
either in a lump sum, or as pension income for a predetermined period, or in somecombination of lump-sum payments and pension income.

The period over which

pension income is paid after retirement varies in tekikaku plans and is an option given
to the employees, but it is by law for life in kosei plans. However, the transfer from the6hikiate plan, which virtually all listed firms carried at least initially, to either tekikaku or
kosei plans can take one of three different routes.
In zenmen ikou (zenmen transfer for short), the hikiate plan is completely
dissolved and replaced by the newly adopted plan, which assumes the liabilities to pay
for the accumulated benefits of the hikiate plan. The main advantage of this option for
the firm is three-fold. First, with the dissolution of the hikiate plan, the firm is freed
from the considerable administrative and accounting details involved such as
periodically updating the account, determining the amount of eligible tax credits, andpaying benefits for both retirement and non-retirement severance whenever employees
leave the firm.

Second, there is the tax advantage that comes from the higher

deductibility of future premium contributions to the new plan as compared to what thehikiate plan alone will have allowed.

Third, the firm is freed from lump-sum

settlements on accumulated non-retirement severance benefits whenever eligible
employees leave the firm. Such settlements are made directly by the managed plan.
Despite these merits, the majority of Japanese corporations have not chosen this route,mainly because it requires commensurately higher premium payments to cover theaccumulated indemnity of the replaced hikiate plan.10
Alternatively, firms may elect yokowari ichibu ikou (meaning “horizontal partial
transfer,” or ichibu transfer for short), transferring some portions of the hikiate
severance benefits to the new plan. Under this option, the hikiate plan is partiallydissolved as the new plan is implemented, which then assumes fiduciary responsibilities
for the transferred benefits. The tax advantage, therefore, is smaller than the zenmen

7

transfer, because tax credits for the remaining hikiate plan are lower than the new plan
for an equivalent level of future benefits covered. However, many firms elect thisoption because they may feel that it offers a temporary cash-flow advantage over thezenmen option, in that its premium payments are less. The risk for the firm, of course,is that it must finance the non-transferred portion of severance payments in a lump sum
whenever eligible employees leave the firm, and the non-retirement severance isunpredictable.
The third option is teinen ikou (“transfer of retirement benefits,” or teinentransfer for short), under which the existing hikiate plan is retained, and the new plan is
set up to provide for the payment of only the retirement benefits that include bothpension and non-pension benefits. The limit on tax credits allowed in the hikiate plan is
pro-rated by law to the non-retirement severance payments.11 Therefore, corporations
electing teinen transfer are able to claim the same amount of tax deductions formaintaining the hikiate plan as before the transfer, because the transfer does not affectthe non-retirement severance indemnity that is used for computing the deductibility
limit. Premium contributions to the new plan, in the meantime, are fully tax-deductible.
Consequently, this redundancy in tax shelter generally gives the teinen option thelargest tax advantage among the three options.12 In addition, since the new plan using
this option covers only the retirement benefits, the required premium payments are lessthan the zenmen option.13 However, all non-retirement accumulated severance benefits
must be paid in a lump sum as before. Table 1 summarizes the three forms of transfer

8

available among the tekikaku and kosei plans with respect to the tax merit and the cash
burden on the firm.
[Table 1 near here]

THE TIMING OF PENSION PLAN’S ADOPTION
Planning for the tekikaku plan typically begins in earnest at least a year inadvance of its formal adoption. The chief financial contractor, either a life insurance ortrust bank agency, is chosen during this planning period, and it draws up a detailed
schedule of the terms of the pension plan in accordance with the mandate given by thecontracting firm. This is the phase in which information regarding the firm’s intentions
begins to be transmitted to the market. Upon final approval by the firm’s management,
typically between 30 and 60 days prior to the plan’s implementation, the plan’scontractor applies for a permit to execute the plan from the National Tax Office of the
Ministry of Finance on behalf of the contracting firm. This permit is granted routinely.
The public announcement of the firm’s decision to implement the new pension plan,
however, does not occur until the release of the firm’s financial statement that typicallytakes place three months following the end of the fiscal year. The announcement of thepension plan is made in a footnote to its financial statement.
The kosei plan takes a somewhat longer preparatory period, typically two to
three years in advance of its actual implementation, because of the more cumbersome
procedural requirements. The Ministry of Health and Welfare requires submission ofdetailed documents pertaining to the plan for preliminary examination by its pension

9

office, followed by a formal hearing on the proposed plan. The official justification isthat a detailed scrutiny is warranted because the kosei plan is by law entrusted with the
responsibility to absorb and carry a portion of the social security retirement benefits.
Based on the outcome of the hearing, an informal permit called naininka is granted,
which allows the firm to proceed with the formal permit application, to which theconsent of the firm's labor union representatives must be affixed. Once the informal
permit is granted, the rest of the process takes approximately three months until thefinancial terms of the plan are worked out with the chosen contractor, whereupon theplan is implemented.

Public notice of the adoption is given in the government

publication Kanpo, approximately one month after the plan’s formal adoption. The
firm's financial statement released typically three months after the end of the fiscal year
also contains a footnote announcement in the same manner as the tekikaku plan.

THE EMPIRICAL ISSUES
Given the extensive governmental regulation bearing on the establishment andthe management of the Japanese corporate pension plans,14 and the complexity of thepension system as a whole, does the firm’s pension adoption still contain useful
information to which the stock market responds? And given the long planning process
involved in the Japanese corporate decision regarding pension adoption, how long priorto, as well as subsequent to the plan’s adoption does the market respond, if ever? By
adopting either the tekikaku or kosei plan, the firm must also decide on the particularform of transfer from the hikiate plan in place to one of the alternative new plans. Of

10the three types of transfer available, the ichibu transfer is the least advantageous interms of tax benefits, and the teinen offers the largest tax savings for the same level of
total benefits covered. Does the market response go so far as to differentiate among
these transfer options of the adoption decision?
Consistent with the maintained hypothesis as stated in the introductory section,
the empirical issues to be investigated can be summarized by the following null
hypotheses.
Hypothesis 1 (null): The timing of pension adoption decisions has no effect on the stock
market.
Hypothesis 2 (null): The stock market is indifferent among the three forms of the plan’stransfer options.

THE ESTIMATION METHOD
We estimate the stock market impact of pension decisions using monthly
prediction errors from the market model. The model assumes that the individual shareprice reflects all available information, including the market-wide information that
affects the entire stock market. Hence, we must separate the impact of firm-specificinformation such as pension adoption from the market-wide informational impact inarriving at our estimate of abnormal returns. We estimate these returns for eachcompany on a monthly basis, beginning at the thirty-fifth month (t = -35) prior to theevent month through the eleventh month following the event (t = +11). The choice of

11this relatively long "window" is motivated by the time frame of the Japanese corporate
pension decision process.
For the specification of the event month, we use the following three alternatives.
Event “A”:

the month in which the new pension plan is formerly adopted(implemented).
Event “C”: the month in which the plan’s chief financial contractor draws up the planwith detailed terms of the plan, following the mandate given by the firm’s top
management. This occurs typically one month prior to the plan’s formal adoption
among the tekikaku plans, and three months prior to adoption among the kosei plans.
Event “P”:

the month in which the financial statement of the firm is released,

containing public announcement about the adoption of a new pension plan . Thisoccurs typically three months after the end of the fiscal year.15 Hence, as an event
month, this lags behind the adoption month (event “A”) by 3 to 14 months.
An abnormal return (i.e., prediction error) on firm i's equity share (Eit) for
month t is calculated as the difference between the observed return and the return
predicted by the market model:
Eit = Rit - (Ai + Bi Rmt)

(1)

where
t =

the month index for the test (prediction) period, -35, ..., 0, ..., +11, with t =0 for the event monthRit =the natural logarithm of the rate of return of the common stock of firm i
at the end of month t

12Rmt = the natural logarithm of the average rate of return of common stocks
evaluated from the JSRI (Japan Securities Resource Institute) index ofstock prices
Ai, Bi = the firm's estimated parameters of the market model obtained from thepreceding four-year estimation period, t= -83, …, -36.

The average abnormal return for the test month t is given byN

AEt = ( ∑ Eit) / N

(2)

i=1

where N is the number of firms in the sample. The cumulative average abnormal
returns, CAT, are then the sum of AEt over the test period:
T

CAT =

∑ AEt

(3)

t=-35

where T = -35, ..., 0, ..., +11.
As is now well recognized in the literature, stock returns generally exhibit timevarying volatility, and hence the OLS estimates of the market model are inefficient. For
this reason, Bera, Bubnys and Park (1988), for instance, use the market model relying
on the Autoregressive Conditional Heteroskedasticity (ARCH) process. For this study,
we apply the Generalized Autoregressive Conditional Heteroskedastic (GARCH)
estimation method originally developed by Bollerslev (1986, 1987), using the
GARCH(1,1) version as follows:
Ei t = Ri t - (Ai + Bi Rm t)
Ei t /ψi t-1 ∼ τ (0, σ2it, ν)

(4)

13

σ2it = ai 0 + ai 1 E2i t-1 + b i 1 σ2i t-1
where ψi t-1 is the set of all information through time t-1 on firm i (i =1…N); τ is thestudent-t distribution with zero mean, variance σ2it, and ν degrees of freedom; and Ai ,Bi, ai0, ai1, bi1 are the maximum-likelihood estimates of the true parameters. 16 The
algorithms we use for estimation are the Version2 of Eviews.
We first test the statistical significance of AEt and CAT. We then estimate theregression of CAT on the available pension information including the types of transfer
adopted, controlling for the firm's earnings variable.

THE DATA USEDThe period chosen for this study spans over twenty years, from January 1975
through March 1995.

The choice of this period is motivated by (1) the availability ofcompany data on the status of pension plans adopted, (2) the critical period in theJapanese corporate history when explicit pension plans in the form of either the
tekikaku or kosei plan began to be adopted in earnest, and (3) a period sufficiently long
to include the development and the subsequent collapse of the major speculative bubble
in the Japanese stock market. In particular, we are motivated in (3) by the question:
Are the efficiency implications of the market model with respect to corporate pensions
borne out generally despite the market upheaval associated with the bubble
phenomenon?
We examined the financial statements of all 1,152 companies listed in the First
Sections of the Tokyo, Osaka and Nagoya Stock Exchanges excluding banks, finance14

and insurance businesses. Of these companies, 1087 had corporate pension plans, but
the date of adoption could not be ascertained for 393 companies which were thus
excluded from our sample. Among the remaining 694 companies we found 408 adopted
either tekikaku or kosei plans during the period covered. But this list contains 80
companies that were not listed on the exchanges at the time of the plan’s adoption.
Excluding these companies, our final list contains 328 companies, 267 carrying the
tekikaku plan, and 61 the kosei plan. Tables 2 and 3 present the distribution of thesecompanies by industry and the adoption year, respectively.
[Table 2 near here][Table 3 near here]
The data used for this study are from Nihon Shoken Keizai Kenkyusho (Japan
Securities Resource Institute), generally recognized to be the best source on stock prices,
dividend payments, issuance of new shares, new listings, de-listing, and other changes in
the listed companies.

THE EMPIRICAL RESULTS
Table 4 presents the estimated AEt and CAT assessed at monthly intervals for the
328 firms with pension plans. Positive and statistically significant (at least at the 5%
level) average abnormal returns are obtained in a substantial number of cases, 17
suggesting that the market does react favorably to information regarding the pension
adoption over the relatively long period.

The cumulative abnormal returns are

statistically significant every month at the 1% level from t= -25 forward (to t= +11) in

15

the adoption event, and from t= -24 forward in both the contract and publicannouncement events. The positive and statistically significant cumulative effect thatremains several months beyond the event month suggests that the information’s impact
is substantial.
[Table 4 near here]
Graph 1 presents the plot of cumulative average abnormal returns. The top
three in the graph correspond to the three series of cumulative returns reported in table
4. This result, however, does not control for the effect of corporate earnings that havebeen shown to affect stock prices.18 Accordingly, we conduct a pair-match analysis for
a comparative purpose:for each corporation that has either the tekikaku or the

kosei plan, another corporation carrying only the hikiate plan that most closely matches
the control firm's earnings in the same industry is chosen.19 The bottom three series in
the graph show deviations in the cumulative returns between the control firm and its
paired match. They point to the presence of statistically significant cumulative returns,
after controlling for the effect of earnings.20[Graph 1 near here]
We report in table 5 the result of regression analysis that focuses on explaining
the cumulative abnormal returns for different sub-periods surrounding the event
month, controlling for corporate earnings.21 The regression is a pair-match analysis,
where the paired match is selected by applying the same earnings criteria as in thepreceding paragraph.

Hence, 656 (= 2x328) firms are entered into the regression

analysis. Finally, in order to correct for possible cross sectional correlations in the stock16

returns that may bias the regression estimate, we apply White’s method (1980) for
heteroskedasticity correction.
[Table 5 near here]
The dependent variable CA(m,0) is the sum of abnormal returns cumulative
over the period, t=m through the event month. We report results from several subperiods, to convey a sense of the time frame when the pension information appears tomake an impact on the market. It is clear that the earnings variable plays a dominantrole in explaining the abnormal returns as it is highly significant in all cases.
Controlling for this variable, however, we find that the dummy variable for pension
enters positively in each regression, with statistical significance at the 5% level in the (23, 0) and (-11,0) period except for the event month “P”.
It is of considerable interest, therefore, to examine if the choice among thetransfer options that firms elect makes a difference. Accordingly, we report the resultof another regression that differentiates among the three forms of transfer. As it turns
out, both the teinen and zenmen transfers register a statistically significant result at
least at the 5% level in the (-23, 0), as well as (-11, 0) period associated with the adoption(“A”) and contract (“C”) event months. Pension adoption with the ichibu transfer,
however, fails in the significance test in all cases, indicating that pension adoption withthis option did not produce a statistically meaningful impact. This is consistent with the
hypothesis that the more limited nature of tax savings under the ichibu transfer fails to
induce a favorable market response. Moreover, the public announcement (“P”) event
occasioned by the release of the financial statement is in effect a non-event in terms of17market response in the more immediate (-11, 0) period preceding the announcement,
regardless of the transfer options chosen. Evidently, the lateness of this event, lagging
behind the adoption event by up to 14 months, renders this period devoid of
informational impact on the stock market. This is consistent with the notion thatpension information effectively leaks to the market through more private channels suchas the choice of financial contractors and the implementation of the plans.

CONCLUSIONSThe Japanese corporate pension system may appear to be both complex andobtuse, reflecting the heavy dose of governmental regulations, as well as the difficulties
involved in integrating different plans that have evolved from separate origins. There
are different ways in which the more traditional hikiate plan with lump-sum severance
pay is either replaced or interfaced with the newly adopted explicit pension plans. We
have presented evidence that suggests, however, that the decision to adopt an explicit
pension plan induces the stock market response that is also sensitive to the particularforms of transfer options adopted. Moreover, our evidence suggests that this response
pre-dates the release of the firm’s financial statement by a substantial period, limiting
the impact of this particular event in the more immediate months preceding the publicannouncement. The two null hypotheses, therefore, stand to be rejected.
There are a number of additional implications of our findings for further inquiry.
The extensive U.S. pension economics literature has emphasized tax incentives and thetax consequences of corporate pension, and has also addressed the stock market impact

18

of the funding status (in terms of being either unfunded or over-funded) of the existingplans. Our findings on Japanese corporate pension are consistent with the efficiency
implications of new pension adoptions based on tax incentives. But in contrast to
American corporations, Japanese pension plans may be best characterized as “underfunded” with virtually no case of an over-funded pension. Also in contrast to the U.S.
plans, there is no insurance coverage for Japanese corporate pensions, save instances ofa limited insurance coverage in some kosei plans. But the kosei insurance coverage isvoluntary, unlike the American pension plans that must carry insurance under the
Employee Retirement Income Security Act (ERISA) of 1974. To what extent, if any,
does the difference in insurance coverage and the public policy regarding pension
insurance explain the gap in the funding status of pension between the two countries?
We have also shown that the market responds positively to the choice of either
the zenmen or teinen option that has a greater tax advantage than the ichibu transfer.
Indeed, the ichibu option fails consistently in our statistical test, suggesting that themarket assesses its adoption in effect as non-event. But one major difference that exists
in economic characteristics between the zenmen on one hand, and teinen (and ichibu to alesser extent) on the other, is the fact that the latter contains an important risk elementthat is absent in the former. That risk, of course, stems from the uncertainty in thetiming of non-retirement severance of employees and the typically large cash
settlements of accumulated severance benefits that comes with it. In the zenmen option,
all such payments are handled by the managed plan, sparing the firm from a sudden
and unanticipated cash drain. The firm’s regular premium payments under the zenmen

19option, therefore, contain this implicit insurance premium. However, only a small
number of Japanese corporations have elected the zenmen option (see table 3),
suggesting that the insurance premium paid in this form is perhaps too high. There has
never been an explicit insurance market developed in Japan addressing this particularrisk assessment on the corporate cash-flow position. This issue, therefore, remains to be
explored further.

REFERENCES
Alderson, M. J., and K. C. Chen, 1986, Excess Asset Reversions and Shareholder
Wealth, Journal of Finance, 41: 225-241.

20

Alderson, M. J., and J. L. VanDerhei, 1992, Additional Evidence on the Reaction of
Shareholders to the Reversion of Surplus Pension Assets, Journal of Risk andInsurance, 59: 262-274.
American Accounting Association, 1966, A Statement of Basic Accounting Theory.
American Council of Life Insurance, 1987, Pension Facts.
Ball, R., and P. Brown, 1968, An Empirical Evaluation of Accounting Income Numbers,
Journal of Accounting Research, 6: 159-178.
Ball, R., 1972, Changes in Accounting Techniques and Stock Prices, Journal of
Accounting Research, 10 (supplement): 1-38.
Beatty, A., 1995, The Cash Flow and Informational Effects of Employee Stock
Ownership Plans, Journal of Financial Economics, 38: 211-240.
Bera, A., E. Bubnys, and H. Park, 1988, Conditional Heteroskedasticity in the Market
Model and Efficient Estimates of Betas, The Financial Review, 23: 201-214.
Biddle, G. C., and F. W. Lindahl, 1982, Stock Price Reactions to LIFO Adoptions,
Journal of Accounting Research, 20: 551-588.
Bollerslev, T., 1986, Generalized Autoregressive Conditional Heteroskedasticity,
Journal of Econometrics, 31: 307-327.
__________, 1987, A Conditionally Heteroskedastic Time Series Model for Security
Prices and Rates of Return Data, Review of Economics and Statistics, 59: 542-547.
Bulow, J. I., R. Morck, and L. Summers, 1987, How Does the Market Value UnfundedPension Liabilities? in: Z. Bodie, J. B. Shoven, and D. A. Wise, eds., Issues in
Pension Economics (Chicago: The University of Chicago Press), 81-109.

21

Clark, R. L., 1991, Retirement Systems in Japan (Homewood, IL: Irwin).
Corhay, A., and A. T. Rad, 1996, Conditional Heteroskedasticity Adjusted Market
Model and an Event Study, The Quarterly Review of Economics and Finance, 36:
529-538.
Daley, L.A., 1984, The Valuation of Reported Pension Measures for Firm Sponsoring
Defined Benefit Plans, Accounting Review, 59: 177-198.
Dai-ichi Seimei Hoken Sogo Kaisha, 1986, Kigyo Nenkin Gaido (Guide to Corporate
Pension). (Tokyo: Toyo Keizai Shimpo).
Fama, E. F., 1970, Efficient Capital Markets: A Review of Theory and Empirical Work,
Journal of Finance, 25: 387-417.
Feldstein, M., and S. Seligman, 1981, Pension Funding, Share Prices and National
Saving, Journal of Finance, 36: 801-824.
Ito, M., 1989, Haitou Jyohou no Iminaiyou (The informational Content of Dividend
Payments), Shouken Keizai, 167: 138-155.
Kohmura, M., 1987, Gendai Kigyou Kaikei to Shouken Shijyo (Contemporary Corporate
Accounting and the Securities Market) (Tokyo: Doubunkan).
Kunimura, M., 1979, Kaikei Jyohou to Kabuka (Accounting Information and Stock
Prices), Kaikei, 115: 491-503.
Mittlesteadt, H. F., and P. R. Regier, 1993, The Market Response to Pension Plan
Terminations, The Accounting Review, 68: 1-27.
Moore, N. H., and S. W. Pruitt, 1990, A Comment on Excess Asset Reversions andShareholder Wealth, The Journal of Finance, 45: 1709-1714.

22

Murakami, K., 1999, Kigyo Nenkin no Kadai to Tenbou (Problems and Prospect ofCorporate Pension), Sanseiken Forum: 7- 11.
Patell, J. M., 1976, Corporate Forecasts of Earnings per Share and Stock Price
Behavior: Empirical Tests, Journal of Accounting Research, 14: 246-276.
Raifu Dezain Kenkyusho, 1999, Kigyo Nenkin Hakusho (White Paper on Corporate
Pension).
Sakakibara, S., H. Yamaji, H. Sakurai, K. Shiroshita, and S. Fukuda, 1988, The
Japanese Stock Market (New York: Praeger Publishers).
Salamon, G. L., and R. Kopel, 1993, Accounting Method Related Misspecification in
Cross-sectional Capital Market Research Designs, Journal of Accounting andPublic Policy, 12: 217-238.
Sato, H. et al., 1979, Kaikei Houkoku to Kabushiki Shijyou (Accounting Report and theStock Market), Kigyou Kaikei, 31: 60-79.
Seimei Hoken Bunka Senta (Life Insurance Cultural Center), 1993, Kigyou no Fukuri
Kosei Seido ni Kansuru Chousa (Survey on the Corporate Welfare System).
Strong, N., and W. Walker, 1993, The Explanatory Power of Earnings for Stock
Return, The Accounting Review, 68: 385-399.
Tepper, I., and A. R. P. Affleck, 1974, Pension Plan Liabilities and Corporate Financial
Strategies, Journal of Finance, 29: 1549-1564.
Tepper, I., 1981, Taxation and Corporate Pension Policy, Journal of Finance, 36: 1-13.
Theil, H., 1971, Principles of Econometrics (New York: John Wiley & Sons).
VanDerhei, J. L., 1987, The Effect of Voluntary Termination of Overfunded Pension

23Plans on Shareholder Wealth, Journal of Risk and Insurance, 54: 131-156.
White, H., 1980, A Heteroskedasticity-Consistent Covariance Matrix Estimator and a
Direct Test for Heteroskedasticity, Econometrica, 48: 817-838.

ENDNOTES24

1

In this vein, Beatty (1995) also finds that employee stock ownership plans impact positively on

stock prices through the tax advantage they offer, as well as their ability to serve as a deterrent
against hostile takeovers. With respect to the Japanese financial market, Kohmura (1987)
focuses on the depreciation method adopted by firms and its financial market impact, and Ito(1989) on the impact of dividend information, both finding a positive impact. Sakakibara,
Yamaji, Sakurai, Shiroshita, and Fukuda (1988) find evidence that suggests that the Tokyo
Stock Market is "informationally efficient, at least with respect to unconsolidated earnings
information" (p.90).
2

See Tepper and Affleck (1974) and Tepper (1981), in particular.

3

The 1926 revision of the Internal Revenue Code introduced provisions allowing pension

premium contributions as a deductible corporate expense. Corporate pension plans became
prevalent in the U.S. after the Second World War. See American Council of Life Insurance(1987), p.33.
4

See Clark (1991), for example, for more details.

5

Subsequent regulation stipulated that the cumulative credits must not exceed 40% (tightened

further to 20% since 1998) of lump-sum compensation that would be payable at the end of eachyear if all employees were to quit voluntarily in that year. To illustrate, suppose that a firm has
the total severance indemnity of 1 billion yen in a given year − the payment that it will incur if
all its employees were to quit in that year. The maximum hikiate credit that can be claimed as
an expense to be deducted from its corporate income is limited to the difference between 400
million (= 40% of 1 billion) yen and the cumulative total deductions claimed in the past.
6

Commercial banks and brokerage houses were prohibited until recently from managing

private pension funds.
7

The figures are from Raifu Dezain Kenkyusho (1999), p. 17.

8

Prior to 1986, the minimum enrollment requirement was 1,000 employees per plan, which was

reduced to 700 in 1986, and to 500 in 1989 where it has remained.

25

9

We conducted a questionnaire survey of all manufacturing firms listed in the First Section ofTokyo Stock Exchange during the months of August and September 1995. The response we
received indicated that more than 60% of 134 companies that returned the questionnaire listed
tax and the related cost advantage as the primary reason for adopting pension. The format of
the questionnaire we sent follows that of larger-scale surveys conducted earlier by Seimei Hoken
Bunka Senta (Life Insurance Cultural Center) for the year 1992 which also indicated a similar
pattern of response regarding the primary reasons for adopting the respective plans. Our
survey result is available upon request to the authors.
10

However, the firm does not have to fund this indemnity with lump-sum premiums

immediately upon transfer to the new plan. Under the current practice, this can be done withpremium payments stretched over a period spanning from 6 to 30 years.
11

See footnote 5.

12

Murakami (1999), p.8.

13

On average, premium payments under the teinen option are approximately 80% of thepremiums paid under the zenmen option for a typical employee covered by each plan. See Daiichi Seimei Hoken Sogo Kaisha, p. 104.
14

Until the recent deregulation, for instance, the government stipulated that for the purpose of

assessing the future indemnity of the plan, it must set the expected rate of return on premium
contributions at 5.5% per annum. Another regulation, known as the 5-3-3-2 rule, stipulated
that at least 50% of the plan's assets must be in government or other low-risk bonds, no morethan 30% in stocks, no more than 30% in foreign investments, and no more than 20% in realestate investments.
15

Fiscal year ends March 31 for the majority of Japanese corporations. However, some also use

June 30, September 30, or December 31 as the end date of their fiscal year.
16

Corhay and Rad (1996) also use the same process in the market model estimation.

26

17

The z-statistic (with standard normal distribution) used for testing the null hypothesis takes

into account the increase in variance due to prediction outside the estimation period, following
Theil (1971), pp.122-123. For the derivation of the z-statistic for cumulative prediction errors in
the market model, see Patell (1976), p.257.
18

See, for example, Ball and Brown (1968) and Strong and Walker (1993) for the U.S., and Satoet al. (1979) and Kunimura (1979) for Japanese studies. Kunimura’s study, in particular,presents evidence in support of Fama’s semi-strong form hypothesis on the relationship between
earnings forecast and the stock price.
19

We define the earnings variable as change in the annual rate of return on capital preceding

the adoption month.
20

We selected a random sample of firms that carry only the hikiate plan, in order to see if there

is any baseline tendency for abnormal returns to accumulate over time. Using 50 firms, andthree different benchmark “event” months, we detected no evidence of a systematic trend bias.
21

For the importance of controlling for the earnings variable in the regression specification, see

Salamon and Kopel (1993).

27

TABLE 1. THREE FORMS OF TRANSFER FROM HIKIATE TO TEKIKAKU OR KOSEI PENSION PLANSZENMEN Transfer

ICHIBU Transfer

TEINEN Transfer

Benefits transferred:

All severance (retirement plus nonretirement) benefits.

Portions of severance (retirement plus non-retirement)
benefits.

Retirement benefits only.

Status of the hikiate plan
after transfer:

Dissolved.

Partially dissolved.

No change − the hikiate planremains in place.

Corporate income tax
advantage:

All premium contributions
are tax-deductible.

Premium payments for the transferred portion of severance benefits and the eligible hikiate credits
for the remaining portion of thehikiate plan are tax-deductible.
The least tax-advantageousamong the three options.

Premium contributions to theplan plus eligible hikiate credits
are tax-deductible. The mosttax-advantageous among thethree options.

Pre-retirement funding
burden to the firm:

Premiums for all severance benefits(both retirement and non-retirement)
paid on the regular basis. Premium
payment requirements are thelargest among the three options.

Premium payments for the transPremium payments for retireferred portion of benefits plus
ment benefits on the regularlump-sum payments for the remain- basis plus lump-sum payments
ing portion whenever severance
for all non-retirement severance.
occurs.

Funding requirements forthe firm when employees
retire:None. (All payments are met by theexternally managed plan.)Must fund the non-transferred
portion of retirement benefits.

Lump-sum retirement payments
for the remaining hikiate plan.

TABLE 2. DISTRIBUTION OF PENSION PLANS BY INDUSTRY_______________________________________________________________________
Industry
Tekikaku Plan Kosei Plan
Total_______________________________________________________________________
Agriculture, forestry, fisheries
and mining
Construction
Foods
TextilesPulp and papers
ChemicalsOil, coal, rubber, glass, clay & stones
Ferrous metals
Non-ferrous metals
Metal products
Machinery
Electric tools
Transportation equipment
Precision instruments
Other manufactures
Commerce
Real estateTransportation and communications
Utilities (electricity & gas)
Services

5
17
16
2
8
33
21
17
4
7
29
26
14
6
7
16
6
23
1
9

1
6
6
2
0
6
1
1
2
1
2
18
2
1
5
6
0
1
0
0

6
23
22
4
8
39
22
18
6
8
31
44
16
7
12
22
6
24
1
9

TOTAL
267
61
328
________________________________________________________________________TABLE 3. DISTRIBUTION OF PENSION PLANS BY ADOPTION YEAR__________________________________________________________________________________YEAR

Tekikaku Plan
Kosei Plan_
Zenmen Ichibu Teinen
Total Zenmen Ichibu Teinen
Total__________________________________________________________________________________

1975
1976
1977
1978
1979

3
0
2
4
2

5
2
2
5
4

0
0
3
2
9

8
2
7
11
15

0
1
2
0
0

2
4
2
3
2

0
1
0
5
2

2
6
4
8
4

1980
1981
1982
1983
1984

6
0
1
1
1

11
6
8
9
5

17
15
10
8
11

34
21
19
18
17

0
1
0
0
0

4
2
4
5
1

1
0
0
0
0

5
3
4
5
1

1985
1986
1987
1988
1989

1
0
0
2
1

8
9
7
4
6

9
9
12
4
6

18
18
19
10
13

0
1
1
1
0

3
1
2
1
3

0
0
0
0
1

3
2
3
2
4

1990
1991
1992
1993
1994

1
2
3
0
0

11
4
1
2
3

4
2
1
2
0

16
8
5
4
3

0
0
0
0
0

2
1
1
0
1

0
0
0
0
0

2
1
1
0
1

1995

0

0

1

1

0

0

0

0

TOTAL
30
112
125
267
7
44
10
61
__________________________________________________________________________________TABLE 4. AVERAGE ABNORMAL RETURNS (AE) AND THEIRCUMULATIVES (CA):ALTERNATIVE EVENT MONTHSMonthEvent “A”
Event “C”
Event “P”
AE
CA
AE
CA
AE
CA
__________________________________________________________________________________
-35
-34
-33
-32
-31

- 0.466 a
0.653 a- 0.166
0.180- 0.290- 0.466 a
0.187
0.021
0.202
- 0.089- 0.174- 0.166 c
0.654 a- 0.333 c
0.248- 0.174- 0.339 b0.315- 0.0180.231- 0.079
0.386 c
- 0.202
0.175
0.142

- 0.079
0.307
0.105
0.283
0.422

-30
-29
-28
-27
-26

0.418
0.645 c
0.229
0.524
0.227

0.329
0.974
1.203
1.726
1.953 b0.024
0.567 b0.280
0.199
0.615 b

0.255
0.822
1.102
1.301
1.916

0.225
0.168
0.549 b
- 0.068- 0.132

0.647
0.815
1.364 b1.296 b
1.164

-25
-24
-23
-22
-21

0.815 a0.444
0.076
0.560 c0.281

2.768 a3.212 a3.288 a3.848 a4.130 a0.185
0.894 a0.408
0.206
0.642 b2.101 c2.995 a3.403 a3.608 a4.250 a0.505
0.760 a- 0.068
0.292 c0.009

1.669 b2.429 a2.361 a2.653 a2.662 a

-20
-19
-18
-17
-16

0.344
0.191
0.409 c
- 0.178
0.280

4.473 a4.664 a5.073 a4.895 a5.175 a0.406
0.429 c0.121
0.356
- 0.2034.656 a5.084 a5.206 a5.562 a5.359 a

0.172
0.100
- 0.060
0.754 a0.792 a2.834 a2.935 a2.874 a3.628 a4.420 a

-15
-14
-13
-12
-11

0.281
0.207
0.315
0.051
0.184

5.456 a5.663 a5.978 a6.029 a6.213 a0.399 c
0.336
0.310
0.260
- 0.192

5.759 a6.095 a6.406 a6.665 a6.473 a0.222
- 0.3020.807 a0.255 b0.301

4.642 a4.340 a5.148 a5.403 a5.704 a

-10
-9
-8
-7
-6

0.356
0.388
0.572 b0.777 a- 0.028

6.569 a6.957 a7.529 a8.306 a8.278 a0.310
0.533 c0.396
0.423 c0.605 b6.783 a7.317 a7.713 a8.136 a8.741 a0.633 a- 0.0130.237
0.145- 0.152

6.337 a6.324 a6.561 a6.706 a6.554 a

-5
-4
-3
-2
-1

0.768 a
0.230
0.372
0.265
0.720 a9.046 a9.276 a9.648 a9.914 a10.634 a0.140
0.654 a0.302
0.437 b0.132

8.881 a9.535 a9.837 a10.274 a
10.406 a

0.048
0.734 a0.054
- 0.160
0.448 c6.602 a7.336 a7.390 a7.230 a7.678 a

Table 4 – Continued

Month

Event “A”
Event “C”
Event “P”
AE
CA
AE
CA
AE
CA
__________________________________________________________________________________
0
+1
+2
+3
+4

- 0.210
0.329
0.333
0.015
0.402 c10.424 a
10.752 a
11.085 a
11.100 a
11.503 a

0.863 a- 0.154
0.203
0.303
0.175

11.268 a
11.114 a
11.317 a
11.620 a
11.796 a0.219- 0.341 c
0.212
0.010
- 0.343 c

7.896 a7.555 a7.767 a7.777 a7.433 a

+5
+6
+7
+8
+9

0.131
- 0.139- 0.073- 0.1390.058

11.634 a
11.495 a
11.422 a
11.283 a11.341 a

0.475 b0.064
- 0.0640.088- 0.236

12.270 a
12.334 a
12.270 a
12.358 a
12.121 a- 0.149- 0.0360.218
0.443 c0.452 b7.284 a7.248 a7.466 a7.909 a8.361 a+10
+110.617 a- 0.151

11.958 a
11.807 a

0.046
0.468 b12.167 a
12.636 a- 0.101
0.402 a8.260 a8.662 aThe superscripts following the estimated values indicate statistical significance at 1% (a), 5% (b),and 10% (c), respectively, using the two-tailed critical z-value. (See footnote 17 for more detail.)
Events “A”, “C” and “P” designate the plan’s adoption month, the contract completion month,and the month of financial statement release, respectively.

TABLE 5. REGRESSION ANALYSIS OF CUMULATIVE ABNORMAL RETURNS, PENSION-PLAN (D=1) VS. PAIR-MATCHEDHIKIATE-ONLY (D=0) CORPORATIONS: ALTERNATIVE EVENT MONTHS

Dependent
PensionCorporate
D times
D times
D times
Adjusted
SampleVariable
Constant
Dummy (D)Earnings
ZenmenIchibuTeinenR2
F-ValueSize_____________________________________________________________________________________________________________________EVENT “A”: THE PLAN’S ADOPTION MONTH
CA(-35,0)

CA(-23,0)

CA(-11,0)5.976 a(4.117)5.984 a(4.117)2.807 c(1.288)3.565 a(2.861)
3.569 a(2.861)

2.959 b(1.679)1.708 b(2.054)1.704 b(2.047)2.419 b(2.106)3.309 a(4.563)3.281 a(4.521)2.201 a(3.134)2.157 a(3.108)1.211 a(5.594)
1.197 a(5.515)

6.103(1.185)7.417 b(1.670)5.304 b(1.905)1.094(0.419)0.451(0.217)- 0.249(-0.187)

3.897 c(1.286)4.661 b(2.051)4.728 a(3.153)0.078

28.62 a

656

0.077

14.63 a

656

0.070

25.71 a

656

0.073

13.97 a

656

0.062

22.47 a

656

0.073

13.95 a

656

0.082

30.24 a

656

0.083

15.85 a656

EVENT “C”: THE PLAN’S CONTRACT COMPLETION MONTH
CA(-35,0)

6.733 a(4.591)6.737 a(4.587)2.825(1.277)3.449 a(4.436)3.438 a(4.406)9.875 b(1.896)1.248(0.473)2.720(0.886)

Table 5 - Continued
Dependent
PensionCorporate
D times
D times
D times
Adjusted
Sample2
Variable
Constant
Dummy (D)Earnings
ZenmenIchibuTeinenR
F-ValueSize_____________________________________________________________________________________________________________________
CA(-23,0)

CA(-11,0)4.305 a(3.367)4.308 a(3.366)3.250 b(1.811)2.218 a(2.575)2.212 a(2.567)

1.961 b(1.682)2.301 a(3.084)2.260 a(3.060)1.634 a(4.916)
1.579 a(4.780)10.336 b(2.254)8.093 a(2.872)1.024(0.483)- 0.642(-0.486)

3.903 b(1.715)

3.337 b(2.169)0.074

27.27 a

656

0.079

15.02 a

656

0.066

24.10 a

656

0.081

15.34 a

656

0.061

22.16 a

656

0.059

11.25 a

656

0.064

23.32 a

656

0.063

12.06 a

656

0.042

15.30 a

656

0.040

7.86 a656

EVENT “P”: THE STATEMENT RELEASE MONTH
CA(-35,0)

CA(-23,0)

CA(-11,0)4.213 a(2.710)4.223 a(2.712)2.238(1.035)2.058 b(1.753)2.060 b(1.752)2.813 b(1.763)

1.543 b(2.110)1.544 b(2.109)0.737(0.707)2.915 a(4.983)2.884 a(4.927)1.908 a(4.038)1.882 a(4.010)0.969 a(5.248)0.975 a(5.259)1.458(0.317)4.565 c(1.395)- 0.310(-0.159)

1.064(0.399)1.323(0.677)0.295(0.226)3.822 c(1.345)4.070 b(1.981)

1.528(1.098)CA(p,q) is the sum of abnormal returns over the period (month p to q). The superscripts following the estimated values indicate statisticalsignificance at 1%( a), 5%( b), and 10%( c), respectively. The t-values are in parentheses.

GRAPH 1. CUMULATIVE AVERAGE ABNORMAL RETURNS
% 14
12
10
8
6
4
2
0
‑2

‑35 ‑33 ‑31 ‑29 ‑27 ‑25 ‑23 ‑21 ‑19 ‑17 ‑15 ‑13 ‑11 ‑9 ‑7 ‑5 ‑3 ‑1

1

3

5

7

9

11

‑4

Month (t)Event “A”: t=0 for the plan's adoption month

Event “C”: t=0 for the plan's contract completion month

Event “P”: t=0 for the month of financial statement releasePair-match deviations, event “A”

Pair-match deviations, event “C”

Pair-match deviations, event “P”