Why Do Healthy Firms Freeze Their Defined Benefit Pension Plans?
Simon Fraser University (SFU)
Simon Fraser University
May 20, 2010
Global Finance Journal, Vol. 21, No. 3, pp. 293-303, 2010
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
Date posted: January 14, 2009 ; Last revised: December 14, 2010