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

  • Atanasova, Christina
  • Hrazdil, Karel
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    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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    File URL: http://www.sciencedirect.com/science/article/B6W4F-511R9N3-6/2/759fa37e2af528838530659cfa4cccc1
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    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
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620162

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    1. 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.
    2. Daniel, Kent, et al, 1997. " Measuring Mutual Fund Performance with Characteristic-Based Benchmarks," Journal of Finance, American Finance Association, vol. 52(3), pages 1035-58, July.
    3. Joshua D. Rauh, 2006. "Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans," Journal of Finance, American Finance Association, vol. 61(1), pages 33-71, 02.
    4. Francesco Franzoni & José M. Marin, 2005. "Portable Alphas from Pension Mispricing," Working Papers 227, Barcelona Graduate School of Economics.
    5. Leora Friedberg & Anthony Webb, 2003. "Retirement and the Evolution of Pension Structure," NBER Working Papers 9999, National Bureau of Economic Research, Inc.
    6. Joshua D. Rauh, 2009. "Risk Shifting versus Risk Management: Investment Policy in Corporate Pension Plans," Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2487-2533, July.
    7. 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, vol. 81(1), pages 1-26, July.
    8. Martin, Linda J. & Henderson, Glenn V., 1983. "On Bond Ratings and Pension Obligations: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(04), pages 463-470, December.
    9. Martin Feldstein & Stephanie Seligman, 1980. "Pension Funding, Share Prices, and National Saving," NBER Working Papers 0509, National Bureau of Economic Research, Inc.
    10. Francesco Franzoni & José M. Marín, 2005. "Pension plan funding and stock market efficiency," Economics Working Papers 871, Department of Economics and Business, Universitat Pompeu Fabra.
    11. Jeremy I. Bulow & Randall Morck & Lawrence H. Summers, 1987. "How Does the Market Value Unfunded Pension Liabilities?," NBER Chapters, in: Issues in Pension Economics, pages 81-110 National Bureau of Economic Research, Inc.
    12. 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.
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