CASH FLOW VARIABILITY AND FIRMS PENSION CHOICE - A ROLE FOR OPERATINGLEVERAGE

When financial markets are imperfect or financial distress is costly, firms may choose to reduce their risk by lowering financial or operati ng leverage. This paper examines the role of operating leverage in the firm's pension choice. Contributions to defined contribution plans ar e more flexible than contributions to defined benefit plans. Firms may therefore reduce their operating leverage by selecting a defined cont ribution plan. I find empirical support for this hypothesis which is r obust to controls for labor market factors and the continuing trend to ward defined contribution pension plans.