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Are potential effects of SFAS 158 associated with firms' decisions to freeze their defined benefit pension plans?

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  • Cathy Beaudoin
  • Nandini Chandar
  • Edward M. Werner
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    Abstract

    Purpose – The purpose of this paper is to examine whether the significant clustering of defined benefit (DB) pension plan freeze announcements during 2001-2006 is motivated at least in part by accounting concerns due to the Financial Accounting Standards Board's pending adoption of Statement of Financial Accounting Standards No. 158 (SFAS 158). Design/methodology/approach – Using logistic regression models, the paper compares 147 “freeze firms” with a matched sample of firms that did not announce a DB plan freeze. Empirical models control for other DB plan motives including as a response to stricter contribution requirements under the Pension Protection Act of 2006 and improving the firm's competitive position. Findings – The potential SFAS 158 impact is significantly associated with firms' decisions to freeze their DB plans. Firm profitability is also significantly associated with the freeze decision. However, there is no significant association between cash flow positions or pension plan contributions and the freeze decision. Research limitations/implications – It is possible that economic conditions adversely affecting the funded status of DB plans also motivate the freeze decision. While this study controls for the economic environment, economic factors could exacerbate the potential effect of SFAS 158. Originality/value – This paper considers potential effects of accounting policy by examining its influence on real management actions and has consequences for a variety of stakeholders including investors, creditors, and, importantly, pension beneficiaries and workers, as DB plans represent implicit contracts between firms and their employees.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Review of Accounting and Finance.

    Volume (Year): 9 (2010)
    Issue (Month): 4 (November)
    Pages: 424 - 451

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    Handle: RePEc:eme:rafpps:v:9:y:2010:i:4:p:424-451

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    Related research

    Keywords: Accounting standards; Benefits; Pension funds; United States of America;

    References

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    1. Mittelstaedt, H. Fred, 1989. "An empirical analysis of the factors underlying the decision to remove excess assets from overfunded pension plans," Journal of Accounting and Economics, Elsevier, vol. 11(4), pages 399-418, November.
    2. Francesco Franzoni & José M. Marín, 2006. "Pension Plan Funding and Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 61(2), pages 921-956, 04.
    3. Alicia H. Munnell & Mauricio Soto, 2007. "Why Are Companies Freezing Their Pensions?," Working Papers, Center for Retirement Research at Boston College wp2007-22, Center for Retirement Research, revised Dec 2007.
    4. Greg Niehaus & Tong Yu, 2005. "Cash-Balance Plan Conversions: Evidence on Excise Taxes and Implicit Contracts," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(2), pages 321-352.
    5. Cullinan, Charles P. & Knoblett, James A., 1994. "Unionization and accounting policy choices: An empirical examination," Journal of Accounting and Public Policy, Elsevier, vol. 13(1), pages 49-78.
    6. Arya, Anil & Glover, Jonathan & Mittendorf, Brian & Narayanamoorthy, Ganapathi, 2005. "Unintended consequences of regulating disclosures: The case of Regulation Fair Disclosure," Journal of Accounting and Public Policy, Elsevier, vol. 24(3), pages 243-252.
    7. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    8. Hamdallah, Ahmed El-Sayed & Ruland, William, 1986. "The decision to terminate overfunded pension plans," Journal of Accounting and Public Policy, Elsevier, vol. 5(2), pages 77-91.
    9. Coronado, Julia Lynn & Copeland, Philip C., 2004. "Cash balance pension plan conversions and the new economy," Journal of Pension Economics and Finance, Cambridge University Press, vol. 3(03), pages 297-314, November.
    10. Petersen, Mitchell A, 1992. "Pension Reversions and Worker-Stockholder Wealth Transfers," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 1033-56, August.
    11. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 1992. "The market valuation implications of net periodic pension cost components," Journal of Accounting and Economics, Elsevier, vol. 15(1), pages 27-62, March.
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