Cash flow Variability and Firm's Pension Choice: A Role for Operating Leverage

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