Are potential effects of SFAS 158 associated with firms' decisions to freeze their defined benefit pension plans?

Abstract

Purpose -The purpose of this paper is to examine whether the significant clustering of defined benefit (DB) pension plan freeze announcements during 2001-2006 is motivated at least in part by accounting concerns due to the Financial Accounting Standards Board's pending adoption of Statement of Financial Accounting Standards No. 158 (SFAS 158). Design/methodology/approach -Using logistic regression models, the paper compares 147 ''freeze firms'' with a matched sample of firms that did not announce a DB plan freeze. Empirical models control for other DB plan motives including as a response to stricter contribution requirements under the Pension Protection Act of 2006 and improving the firm's competitive position. Findings -The potential SFAS 158 impact is significantly associated with firms' decisions to freeze their DB plans. Firm profitability is also significantly associated with the freeze decision. However, there is no significant association between cash flow positions or pension plan contributions and the freeze decision. Research limitations/implications -It is possible that economic conditions adversely affecting the funded status of DB plans also motivate the freeze decision. While this study controls for the economic environment, economic factors could exacerbate the potential effect of SFAS 158. Originality/value -This paper considers potential effects of accounting policy by examining its influence on real management actions and has consequences for a variety of stakeholders including investors, creditors, and, importantly, pension beneficiaries and workers, as DB plans represent implicit contracts between firms and their employees.

Changes in the Funded Status of Retirement Plans after the Adoption of SFAS No. 158: Economic Improvement or Balance Sheet Management?

“…Firms with debt‐contracting problems will probably not be in a position to contribute to the retirement plan. In addition, companies that are more unionized are less likely to freeze a pension plan (Munnell and Soto ; Atanasova and Hrazdil ; Beaudoin et al ; Comprix and Muller ) due to the difficulty of negotiating a plan freeze with the union. Companies with high rates of collective bargaining often use more financial leverage (Matsa ), and because unionization tends to reduce the likelihood of freezing plan benefits, high leverage companies are less likely to freeze their retirement plan.…”

“…Second, I develop a comprehensive model using hand‐collected data of all sources of the change in the funded status of retirement plans. Many studies examining how managers respond to changing accounting standards focus on real actions that affect the underlying economics of a transaction (e.g., Imhoff and Thomas ; Mittelstaedt, Nichols, and Regier ; Carter, Lynch, and Tuna ; Bens and Monahan ; Beaudoin, Chandar, and Werner ) . I extend this literature by providing evidence that, in addition to taking real actions, managers use accounting choices to mitigate the effect of a mandatory change in an accounting rule .…”

Pension Contributions and Firm Performance: Evidence from Frozen Defined Benefit Plans

“…In a partial freeze, the firm ceases or limits the accrual of additional benefits for some, usually new hires, but not all employees (Beaudoin, Chandar, and Werner, 2010). When a hard freeze is introduced, all employees become fully vested immediately in benefits earned under the plan, but they are not entitled to earn additional benefits.…”

“…In addition to the exogenous variables from the investment equation, we identify a number of firm characteristics and industry features that are used in the literature to predict the probability of a firm to sponsor or freeze a DB plan (Munnell and Soto, 2007;Beaudoin et al, 2010;Shivdasani and Stefanescu, 2010, among others). In addition to the exogenous variables from the investment equation, we identify a number of firm characteristics and industry features that are used in the literature to predict the probability of a firm to sponsor or freeze a DB plan (Munnell and Soto, 2007;Beaudoin et al, 2010;Shivdasani and Stefanescu, 2010, among others).…”

An Event Study Analysis of Statement of Financial Accounting Standards No. 158

“…158. Beaudoin, Chandar, & Werner (2010) investigate the cause of defined benefit pension plan freezes during the period preceding the promulgation of SFAS No. 158.…”