Are Potential Effects of SFAS 158 Associated with Firms’ Decisions to Freeze Their Defined Benefit Pension Plans?

Review of Accounting and Finance, Vol. 9, No. 4, pp. 424-451

45 Pages Posted: 10 Sep 2007 Last revised: 27 Jan 2011

See all articles by Cathy Beaudoin

Cathy Beaudoin

University of Vermont

Nandini Chandar

Drexel University - Department of Accounting and Tax

Edward M. Werner

Rutgers, The State University of New Jersey

Date Written: August 11, 2009

Abstract

This paper investigates whether the recent clustering of defined benefit (DB) pension plan freeze announcements is motivated at least in part by accounting concerns due to the Financial Accounting Standards Board’s (FASB) pending adoption of Statement of Financial Accounting Standards No. 158 (SFAS 158). We examine freeze announcements during 2001-2006, a period which is marked by increasing sentiment for sweeping pension accounting reform starting with the passage of FRS 17 in the UK and culminating in the adoption of SFAS 158 in the U.S. Using logistic regression models, we compare 147 “freeze firms” with a matched sample of firms that did not announce a DB plan freeze. Our models control for other possible motivations behind the DB plan freeze decision, particularly (1) as a potential response to stricter contribution requirements under the Pension Protection Act of 2006 and (2) managers’ professed rationale of improving the firm’s competitive position. We find strong support for our hypothesis that the potential SFAS 158 impact is significantly associated with firms’ decisions to freeze their DB plans. Our study contributes to research on potential effects of accounting policy by examining its influence on real management actions and has consequences for a variety of stakeholders including investors, creditors, and, importantly, pension beneficiaries and workers, as DB plans represent implicit contracts between firms and their employees.

Keywords: Defined benefit plans, pension freeze, pension accounting, SFAS 158, FRS 17

JEL Classification: C12, C35, M41

Suggested Citation

Beaudoin, Cathy and Chandar, Nandini and Werner, Edward M., Are Potential Effects of SFAS 158 Associated with Firms’ Decisions to Freeze Their Defined Benefit Pension Plans? (August 11, 2009). Review of Accounting and Finance, Vol. 9, No. 4, pp. 424-451, Available at SSRN: https://ssrn.com/abstract=1012672

Cathy Beaudoin

University of Vermont ( email )

212 Kalkin Hall
Burlington, VT 05405-0158
United States

Nandini Chandar

Drexel University - Department of Accounting and Tax ( email )

Philadelphia, PA 19104
United States

Edward M. Werner (Contact Author)

Rutgers, The State University of New Jersey ( email )

Camden, NJ 08102
United States
(856) 225-6978 (Phone)

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