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Do Markets Like Frozen Defined Benefit Pensions? An Event Study
Author(s) -
Milevsky Moshe A.,
Song Keke
Publication year - 2010
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2010.01363.x
Subject(s) - pension plan , financial distress , pension , equity (law) , business , actuarial science , event study , finance , plan (archaeology) , monetary economics , accounting , economics , financial system , history , paleontology , context (archaeology) , archaeology , political science , law , biology
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.