Does freezing a defined benefit pension plan affect firm risk?

Helen Choy, Jui-Chia Lin, Micah S. Officer*

*Corresponding author for this work

Research output: Contribution to journalArticle

23 Scopus citations

Abstract

This paper examines the impact of a defined benefit (DB) pension plan freeze on the sponsoring firm's risk and risk-taking activities. Using a sample of firms declaring a hard freeze on their DB plans between 2002 and 2007, we observe an increase in total risk (proxied by the standard deviation of EBITDA and asset beta), equity risk (standard deviation of returns), and credit risk following a DB-plan freeze. The increase in credit risk is reflected in a decline in credit ratings and an increase in bond yields for freezing firms. When we examine investment strategies, we observe a shift in investment from capital expenditures before the freeze to more-risky R&D projects after the freeze, and an increase in leverage. These strategies (increased focus on R&D and higher leverage) increase the operating and financial risk the firm faces. Overall, we observe an increase in risk-taking following DB plan freezes, consistent with theories that DB plans act as "inside debt" that aligns managers' interests with bondholders'.

Original languageEnglish
Pages (from-to)1-21
Number of pages21
JournalJournal of Accounting and Economics
Volume57
Issue number1
DOIs
StatePublished - 1 Feb 2014

Keywords

  • Defined benefit pension plan
  • Firm risk
  • Pension plan freeze
  • Risk-taking activities

Fingerprint Dive into the research topics of 'Does freezing a defined benefit pension plan affect firm risk?'. Together they form a unique fingerprint.

Cite this