Why Do Healthy Firms Freeze Their Defined Benefit Pension Plans?

Abstract

We examine firms' decisions in freezing their defined-benefit pension plans and the effect it has on shareholders’ wealth. Plan freezes help relieve sponsors of the implicit promises made to employees regarding future compensation. We find evidence that a pension plan freeze has a positive impact on sponsors’ equity returns and credit ratings. Firms that choose to freeze their pension plans experience an increase in equity return and a decrease in the probability of a credit downgrade.

Keywords: Defined benefit pensions, plan freeze, wealth transfer, equity returns, credit ratings

JEL Classification: G23, G32