The Stock Market Reactions to Terminations of Over Funded Pension Plans
Managerial Finance, Volume 24, Number 12, 1998
29 Pages Posted: 1 Nov 2018
Date Written: 1998
Using most recent firm level data over the period 1986-1994, this study examines the stock market reaction with respect to pension plan type (defined benefit or defined contribution) established following the termination of an over funded DB plan. Generally, we find support for the separation hypothesis as the stock market does react significantly following the termination of an existing over funded DB plan and formation of a new DC or DB plan. We find positive market reaction for new DB plan and negative for new DC plan. The results of this study supports the theoretical implication that it is optimal for DC plan participants to take less risk in asset portfolio than DB plan sponsors. In spite of the existing “safety-harbor” regulations for the sponsors of DC plans, it may be important to not only offer the appropriate investment opportunities, but also to educate employees about the relationship between risk and income in retirement.
Keywords: Stock Market Reaction, Pension Plan, Retirement, DC Plan, DB Plan, Risk, Income
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