Do firms’ pension contributions decrease their investment efficiency in Chinese context?

Abstract

Purpose: This research aims to investigate whether increasing the pension contributions of a firm leads to inefficient investments.

Design/methodology/approach: Based on the 26 135 observations of the Chinese listed firms, this study employs ordinary least squares models to investigate the relationship between pension costs and inefficient investments.

Findings/results: This study shows that Chinese listed firms’ pension contribution increments result in fewer investment opportunities and a decreased in investment efficiency. This is insignificant for the more profitable firms and state-owned enterprises. It suggests further that a firm’s pension cost is significantly associated with its investment inefficiency, particularly for cash flow dominated and financing–restricted firms. This indicates a negative association between pension contributions and cash flows, and several pension contributions may lead to a cash flow shortage in the firms.

Practical implications: For managers, they should improve their investment efficiency within an affordable pension plan; for investors, increasing pension costs potentially decrease their investment returns.

Originality/value: Some findings have reference values for some developing countries.