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Why do healthy firms freeze their defined-benefit pension plans?

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  • Atanasova, Christina
  • Hrazdil, Karel
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    Abstract

    We examine the firms' decisions in freezing their defined-benefit pension plans and the effect it has on shareholders' wealth. Plan freezes help relieve sponsors of the implicit promises made to employees regarding future compensation. We find evidence that a pension plan freeze has a positive impact on sponsors' equity returns and credit ratings. Firms that choose to freeze their pension plans experience an increase in equity return and a decrease in the probability of a credit downgrade.

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    Bibliographic Info

    Article provided by Elsevier in its journal Global Finance Journal.

    Volume (Year): 21 (2010)
    Issue (Month): 3 ()
    Pages: 293-303

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    Handle: RePEc:eee:glofin:v:21:y:2010:i:3:p:293-303

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    Web page: http://www.elsevier.com/locate/inca/620162

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    Keywords: Defined-benefit pensions Plan freeze Wealth transfer Equity returns Credit ratings;

    References

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    1. Jin, Li & Merton, Robert C. & Bodie, Zvi, 2006. "Do a firm's equity returns reflect the risk of its pension plan?," Journal of Financial Economics, Elsevier, Elsevier, vol. 81(1), pages 1-26, July.
    2. Jeremy I. Bulow & Randall Morck & Lawrence H. Summers, 1987. "How Does the Market Value Unfunded Pension Liabilities?," NBER Chapters, National Bureau of Economic Research, Inc, in: Issues in Pension Economics, pages 81-110 National Bureau of Economic Research, Inc.
    3. Francesco Franzoni & José M. Marin, 2005. "Portable Alphas from Pension Mispricing," Working Papers, Barcelona Graduate School of Economics 227, Barcelona Graduate School of Economics.
    4. Joshua D. Rauh, 2006. "Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans," Journal of Finance, American Finance Association, American Finance Association, vol. 61(1), pages 33-71, 02.
    5. Martin, Linda J. & Henderson, Glenn V., 1983. "On Bond Ratings and Pension Obligations: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 18(04), pages 463-470, December.
    6. Martin Feldstein & Stephanie Seligman, 1980. "Pension Funding, Share Prices, and National Saving," NBER Working Papers 0509, National Bureau of Economic Research, Inc.
    7. Francesco Franzoni & José M. Marín, 2005. "Pension plan funding and stock market efficiency," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 871, Department of Economics and Business, Universitat Pompeu Fabra.
    8. Leora Friedberg & Anthony Webb, 2003. "Retirement and the Evolution of Pension Structure," NBER Working Papers 9999, National Bureau of Economic Research, Inc.
    9. Thomas, Jacob K., 1989. "Why do firms terminate their overfunded pension plans?," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 11(4), pages 361-398, November.
    10. Joshua D. Rauh, 2009. "Risk Shifting versus Risk Management: Investment Policy in Corporate Pension Plans," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(7), pages 2487-2533, July.
    11. Petersen, Mitchell A, 1992. "Pension Reversions and Worker-Stockholder Wealth Transfers," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 1033-56, August.
    12. Daniel, Kent, et al, 1997. " Measuring Mutual Fund Performance with Characteristic-Based Benchmarks," Journal of Finance, American Finance Association, American Finance Association, vol. 52(3), pages 1035-58, July.
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    Cited by:
    1. Choy, Helen & Lin, Juichia & Officer, Micah S., 2014. "Does freezing a defined benefit pension plan affect firm risk?," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 57(1), pages 1-21.

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