Do Markets Like Frozen DB Pensions? An Event Study

26 Pages Posted: 31 Jan 2009

See all articles by Moshe A. Milevsky

Moshe A. Milevsky

York University - Schulich School of Business

Keke Song

Melbourne Business School, the University of Melbourne

Date Written: April 15, 2008

Abstract

Using an event-study methodology, we document a positive announcement effect of 3.8% when an American company partially or fully freezes its Defined Benefit (DB) pension plan and replaces it with a Defined Contribution plan, such as a 401(k). This abnormal return is greater for firms with higher stock market beta, higher pension cost, lower historical stock returns and lower return on equity (ROE); all in the years prior to the announcement. In other words, the effect is more pronounced for firms that are more likely to face financial distress. We argue that the phenomenon can be explained by the longevity risk that upon closure is implicitly shifted from corporations to employees. In other words, shareholders cheer because the company is reducing a potentially unquantifiable liability: the risk of pensioners who live for ever.

Suggested Citation

Milevsky, Moshe Arye and Song, Keke, Do Markets Like Frozen DB Pensions? An Event Study (April 15, 2008). Available at SSRN: https://ssrn.com/abstract=1335472 or http://dx.doi.org/10.2139/ssrn.1335472

Moshe Arye Milevsky (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Keke Song

Melbourne Business School, the University of Melbourne ( email )

200 Leicester Steet
Carlton, 3053
Australia

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