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Do Markets Like Frozen Defined Benefit Pensions? An Event Study

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  • Moshe A. Milevsky
  • Keke Song

Abstract

An increasing number of North American companies are freezing or terminating their traditional defined benefit (DB) pension plans. In this article we document a positive announcement effect when a publicly traded company discloses that it has partially or fully frozen its DB plan and replaced it with—or enhanced—the 401(k) defined contribution (DC) plan. This positive risk‐adjusted return is greater for firms with higher beta and/or lower return on equity (ROE) prior to the freeze. In other words the positive impact is more pronounced for firms that are likely to face financial distress if they maintain their traditional pension plan and the associated long‐term promises.

Suggested Citation

  • 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.
    • Handle: RePEc:bla:jrinsu:v:77:y:2010:i:4:p:893-909
    DOI: 10.1111/j.1539-6975.2010.01363.x
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    References listed on IDEAS

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    Cited by:

    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. 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.
    3. 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).
    4. Randy Jorgensen & Tirimba Obonyo & John R. Wingender, 2024. "De-risking pension plans: the impact on firm value from lump-sum buyouts," Risk Management, Palgrave Macmillan, vol. 26(3), pages 1-19, September.
    5. Divya Anantharaman & Feng Gao & Hariom Manchiraju, 2022. "Does social responsibility begin at home? The relation between firms’ pension policies and corporate social responsibility (CSR) activities," Review of Accounting Studies, Springer, vol. 27(1), pages 76-121, March.
    6. Joshua Rauh & Irina Stefanescu & Stephen Zeldes, 2013. "Cost shifting and the freezing of corporate pension plans," Finance and Economics Discussion Series 2013-82, Board of Governors of the Federal Reserve System (U.S.).
    7. Vafeas, Nikos & Vlittis, Adamos, 2018. "Independent directors and defined benefit pension plan freezes," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 505-518.
    8. 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.
    9. 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.

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