Equity Valuation Effects of the Pension Protection Act of 2006

86 Pages Posted: 22 Apr 2008 Last revised: 12 Jul 2010

See all articles by John L. Campbell

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

William C. Schwartz

Oklahoma State University

Date Written: July 3, 2009

Abstract

We investigate the equity valuation effects of the Pension Protection Act of 2006 (hereafter PPA 2006). The PPA 2006 has two main provisions: (1) firms must fully fund their pension plans within seven years (previously allowed 30 years to fund 90 percent of the pension liability), and (2) firms receive a tax deduction for contributions up to 150 percent of the pension liability (previously 100 percent). After controlling for the effects of SFAS 158, growth opportunities, the cost of external funds and other information released during our sample period, we examine pension firms' abnormal returns surrounding key dates in the legislative process leading to the adoption of the PPA 2006. First, we find a mean negative abnormal return of -4.20 percent during the period in which the PPA 2006 was first voted on by Congress. The mean (median) firm in our sample experienced a $310 million ($60 million) decline in market capitalization. Second, we find that the valuation effect was more negative for firms with larger unfunded pension liabilities and larger capital expenditure requirements, while firms with higher marginal tax rates experienced a positive effect. Third, we find no evidence of differential valuation effects for firms in different "at risk" categories as defined by the PPA 2006. Finally, we find a significant number of pension freezes occurred during our sample period. Our results are stronger when excluding these firms from our sample.

Keywords: Pension liabilities, defined benefit plans, pension accounting, Pension Protection Act of 2006

JEL Classification: G12, J33, M41, M49, H25

Suggested Citation

Campbell, John L. and Dhaliwal, Dan S. and Schwartz, William C, Equity Valuation Effects of the Pension Protection Act of 2006 (July 3, 2009). Contemporary Accounting Research, Vol. 27, No. 2, Summer 2010, Available at SSRN: https://ssrn.com/abstract=1123770

John L. Campbell

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

William C Schwartz (Contact Author)

Oklahoma State University ( email )

201 Business
Stillwater, OK 74078-0555
United States
918-594-8168 (Phone)
918-594-8281 (Fax)

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