IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v46y2016i4d10.1007_s11156-014-0487-8.html
   My bibliography  Save this article

Excess of the PBO over the ABO and hard pension freezes

Author

Listed:
  • Kun Yu

    (University of Massachusetts Boston)

Abstract

This paper examines the role of the excess of the projected benefit obligation (PBO) over the accumulated benefit obligation (ABO) in hard pension freezes. Using a sample of 109 firms that announced hard freezes during the period 2003–2008, I find that firms with a larger excess of the PBO over the ABO are more likely to hard freeze their pension plans. Furthermore, I document an average abnormal return of more than 1.2 % on the announcement day for the freeze firms. More importantly, the cumulative abnormal returns around pension freeze announcements are positively associated with the excess of the PBO over the ABO, and this positive association is more pronounced for firms with a higher level of institutional ownership, suggesting that institutional investors are more likely to understand the impact of hard pension freezes on firm value by incorporating pension information disclosed in the footnotes. Overall, this study provides evidence that firms shift away from defined benefit plans through pension freezes, and also highlights the importance of considering the excess of the PBO over the ABO in research on hard pension freezes.

Suggested Citation

  • Kun Yu, 2016. "Excess of the PBO over the ABO and hard pension freezes," Review of Quantitative Finance and Accounting, Springer, vol. 46(4), pages 819-846, May.
    • Handle: RePEc:kap:rqfnac:v:46:y:2016:i:4:d:10.1007_s11156-014-0487-8
    DOI: 10.1007/s11156-014-0487-8
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11156-014-0487-8
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11156-014-0487-8?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hand, Jrm, 1993. "Resolving Lifo Uncertainty - A Theoretical And Empirical Reexamination Of 1974-75 Lifo Adoptions And Nonadoptions," Journal of Accounting Research, Wiley Blackwell, vol. 31(1), pages 21-49.
    2. Kandice Kapinos, 2009. "On the Determinants of Defined Benefit Pension Plan Conversions," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 30(2), pages 149-167, June.
    3. Su†Jane Hsieh & Kenneth R. Ferris & Andrew H. Chen, 1990. "Securities market response to pension fund termination," Contemporary Accounting Research, John Wiley & Sons, vol. 6(2), pages 550-572, March.
    4. Ippolito, Richard A, 1985. "The Labor Contract and True Economic Pension Liabilities," American Economic Review, American Economic Association, vol. 75(5), pages 1031-1043, December.
    5. Comprix, Joseph & Muller III, Karl A., 2011. "Pension plan accounting estimates and the freezing of defined benefit pension plans," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 115-133, February.
    6. Moshe A. Milevsky & Keke Song, 2010. "Do Markets Like Frozen Defined Benefit Pensions? An Event Study," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(4), pages 893-909, December.
    7. Lanen, William N. & Thompson, Rex, 1988. "Stock price reactions as surrogates for the net cash flow effects of corporate policy decisions," Journal of Accounting and Economics, Elsevier, vol. 10(4), pages 311-334, December.
    8. Dechow, PM & Hutton, AP & Sloan, RG, 1996. "Economic consequences of accounting for stock-based compensation," Journal of Accounting Research, Wiley Blackwell, vol. 34, pages 1-20.
    9. 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.
    10. Jeremy I. Bulow, 1982. "What are Corporate Pension Liabilities?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(3), pages 435-452.
    11. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    12. Barbara M. Grein & John R. M. Hand & Kenneth J. Klassen, 2005. "Stock Price Reactions to the Repricing of Employee Stock Options," Contemporary Accounting Research, John Wiley & Sons, vol. 22(4), pages 791-828, December.
    13. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 1998. "Relative valuation roles of equity book value and net income as a function of financial health," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 1-34, February.
    14. Audrey Wen-hsin Hsu & Chung-Fern Wu & Jui-Chia Lin, 2013. "Factors in Managing Actuarial Assumptions for Pension Fair Value: Implications for IAS 19," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 16(01), pages 1-23.
    15. Moore, Norman H & Pruitt, Stephen W, 1990. "Excess Asset Reversions and Shareholder Wealth: A Comment," Journal of Finance, American Finance Association, vol. 45(5), pages 1709-1714, December.
    16. Bikki Jaggi & James P. Winder & Cheng-Few Lee, 2010. "Is There a Future for Fair Value Accounting After the 2008–2009 Financial Crisis?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 13(03), pages 469-493.
    17. Engel, Ellen & Hayes, Rachel M. & Wang, Xue, 2007. "The Sarbanes-Oxley Act and firms' going-private decisions," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 116-145, September.
    18. Kandice Kapinos, 2009. "On the Determinants of Defined Benefit Pension Plan Conversions," Journal of Labor Research, Springer, vol. 30(2), pages 149-167, June.
    19. Hsieh, Su-Jane & Ferris, Kenneth R & Chen, Andrew H, 1997. "Evidence on the Timing and Determinants of Overfunded Pension Plan Termination," Review of Quantitative Finance and Accounting, Springer, vol. 8(2), pages 129-150, March.
    20. Stone, Mary, 1991. "Firm financial stress and pension plan continuation/replacement decisions," Journal of Accounting and Public Policy, Elsevier, vol. 10(3), pages 175-206.
    21. Barth, Mary E. & Kasznik, Ron, 1999. "Share repurchases and intangible assets," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 211-241, December.
    22. 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, April.
    23. Santanu Mitra & Mahmud Hossain, 2009. "Value-relevance of pension transition adjustments and other comprehensive income components in the adoption year of SFAS No. 158," Review of Quantitative Finance and Accounting, Springer, vol. 33(3), pages 279-301, October.
    24. Hirshleifer, David & Teoh, Siew Hong, 2003. "Limited attention, information disclosure, and financial reporting," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 337-386, December.
    25. 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.
    26. Xiaowen Jiang, 2011. "The smoothing of pension expenses: a panel analysis," Review of Quantitative Finance and Accounting, Springer, vol. 37(4), pages 451-476, November.
    27. Clinch, Greg & Shibano, Toshi, 1996. "Differential tax benefits and the pension reversion decision," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 69-106, February.
    28. Thomas, Jacob K., 1989. "Why do firms terminate their overfunded pension plans?," Journal of Accounting and Economics, Elsevier, vol. 11(4), pages 361-398, November.
    29. Hieu V. Phan & Shantaram P. Hegde, 2013. "Pension Contributions and Firm Performance: Evidence from Frozen Defined Benefit Plans," Financial Management, Financial Management Association International, vol. 42(2), pages 373-411, June.
    30. Comprix, Joseph & Muller, Karl A., 2011. "Pension plan accounting estimates and the freezing of defined benefit pension plans," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 115-133.
    31. Alderson, Michael J & Chen, K C, 1986. "Excess Asset Reversions and Shareholder Wealth," Journal of Finance, American Finance Association, vol. 41(1), pages 225-241, March.
    32. Stone, M, 1987. "A Financing Explanation For Overfunded Pension Plan Terminations," Journal of Accounting Research, Wiley Blackwell, vol. 25(2), pages 317-326.
    33. Mary E. Barth & Greg Clinch & Toshi Shibano, 2003. "Market Effects of Recognition and Disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 41(4), pages 581-609, September.
    34. Cathy Beaudoin & Nandini Chandar & Edward M. Werner, 2010. "Are potential effects of SFAS 158 associated with firms' decisions to freeze their defined benefit pension plans?," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 9(4), pages 424-451, November.
    35. F. Wang & Ting Zhang, 2014. "The effect of unfunded pension liabilities on corporate bond ratings, default risk, and recovery rate," Review of Quantitative Finance and Accounting, Springer, vol. 43(4), pages 781-802, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Li, Zezeng & Kara, Alper, 2022. "Pension de-risking choice and firm risk: Traditional versus innovative strategies," International Review of Financial Analysis, Elsevier, vol. 81(C).
    2. Brian Silverstein, 2021. "Defined benefit pension de‐risking and corporate risk‐taking," Financial Management, Financial Management Association International, vol. 50(4), pages 1085-1111, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rauh, Joshua D. & Stefanescu, Irina & Zeldes, Stephen P., 2020. "Cost saving and the freezing of corporate pension plans," Journal of Public Economics, Elsevier, vol. 188(C).
    2. Joshua D. Rauh & Irina Stefanescu & Stephen P. Zeldes, 2020. "Cost Saving and the Freezing of Corporate Pension Plans," NBER Working Papers 27251, National Bureau of Economic Research, Inc.
    3. Hsieh, Su-Jane & Liu, Shuming, 2021. "The cost-of-equity implications of off-balance sheet pension liabilities," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(1).
    4. Luca Larcher & Francis Breedon, 2020. "Discounting and the market valuation of defined benefit pensions," Working Papers 932, Queen Mary University of London, School of Economics and Finance.
    5. Vafeas, Nikos & Vlittis, Adamos, 2018. "Independent directors and defined benefit pension plan freezes," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 505-518.
    6. Guohui Guan & Zongxia Liang & Yi Xia, 2023. "Optimal management of DB pension fund under both underfunded and overfunded cases," Papers 2302.08731, arXiv.org.
    7. Yong-Chul Shin & Kun Yu & Neil Fargher, 2016. "Do investors misprice components of net periodic pension cost?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(3), pages 845-878, September.
    8. H. Fred Mittelstaedt & Philip R. Regier, 1991. "A note on securities market response to pension fund termination," Contemporary Accounting Research, John Wiley & Sons, vol. 8(1), pages 82-93, September.
    9. Paul Klumpes & Mark Whittington & Yong Li, 2009. "Determinants of the Pension Curtailment Decisions of UK Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(7‐8), pages 899-924, September.
    10. Yutaka Horiba & Kazuo Yoshida, 2021. "Determinants of defined-contribution corporate pension adoptions in Japan," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 45(3), pages 486-503, July.
    11. Kazuo Yoshida & Yutaka Horiba, 2012. "Determinants of Defined-Contribution Japanese Corporate Pension Coverage," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 2, pages 33-47, December.
    12. Almaghrabi, Khadija S., 2023. "Non‐operating risk and cash holdings: Evidence from pension risk," Journal of Banking & Finance, Elsevier, vol. 152(C).
    13. Tobias Witter & Thorsten Sellhorn & Jens Müller & Vicky Kiosse, 2022. "Balance sheet smoothing," Berlin School of Economics Discussion Papers 0006, Berlin School of Economics.
    14. Masaki KUSANO, 2022. "Recognition versus Disclosure and Managerial Discretion: Evidence from Japanese Pension Accounting," Discussion papers e-22-008, Graduate School of Economics , Kyoto University.
    15. Brian Silverstein, 2021. "Defined benefit pension de‐risking and corporate risk‐taking," Financial Management, Financial Management Association International, vol. 50(4), pages 1085-1111, December.
    16. Duygun, Meryem & Huang, Bihong & Qian, Xiaolin & Tam, Lewis H.K., 2018. "Corporate pension plans and investment choices: Bargaining or conforming?," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 519-537.
    17. Wei Huang & Bin Qiu, 2022. "Passive insider trading before pension freezes," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(3), pages 607-631, September.
    18. Su†Jane Hsieh & Kenneth R. Ferris & Andrew H. Chen, 1990. "Securities market response to pension fund termination," Contemporary Accounting Research, John Wiley & Sons, vol. 6(2), pages 550-572, March.
    19. Paul Klumpes & Mark Whittington & Yong Li, 2009. "Determinants of the Pension Curtailment Decisions of UK Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(7-8), pages 899-924.
    20. Datta, Sudip & Iskandar-Datta, Mai E. & Zychowicz, Edward J., 1995. "Pension plan terminations, excess asset reversions and securityholder wealth," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 245-259, May.

    More about this item

    Keywords

    Pension freeze; Market reaction; PBO; SFAS No. 158;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:46:y:2016:i:4:d:10.1007_s11156-014-0487-8. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.