Why Do Healthy Firms Freeze Their Defined Benefit Pension Plans?
Posted: 14 Jan 2009 Last revised: 14 Dec 2010
Date Written: May 20, 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
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