[This study, which analyzes stock returns associated with the announcement to terminate overfunded defined-benefit pension plans, differs from prior research by considering both the role of the replacement plan and prior anticipation of the termination by shareholders. These innovations enable us to (1) evaluate the use of the reversion amount (plan assets minus termination liabilities) as a measure of wealth transfer from plan participants to shareholders, and (2) resolve inconsistencies across prior studies regarding the existence of a significantly positive market reaction at the termination announcement. This study provides insight into the controversy over the appropriate measure of pension liability: accumulated benefit obligation (ABO) versus projected benefit obligation (PBO). PBO is based on expected future salaries, while ABO is based on current salaries. Barth (1991, 457) suggests that investors consider expected salaries but view PBO as noisy. The current study complements this finding. By examining stock returns at the time of pension plan termination-when any uncertainty regarding the effects of future salaries on pension liability is resolved-we are able to assess whether investors use future salaries to value pension liabilities prior to termination. In addition, the study describes institutional features of pension plans and illustrates the Lanen and Thompson (1988) result that market anticipation may attenuate the relation between the market reaction to and the cash flow effects of an event. We hypothesize that the change in stock price at the time of termination is directly related to the wealth transfer from plan participants to shareholders. If defined-benefit coverage is continued after termination, the primary wealth transfer is from retired participants because annuity contracts purchased from insurance companies typically do not allow for cost-of-living adjustments (COLAs). If defined-benefit coverage is canceled, retired workers lose COLAs, and current workers lose the difference between pension liabilities based on future salaries and those based on current salaries. The results are presented in a descriptive, systematic fashion in order to properly associate any market reaction with underlying features of termination and to ascertain the cause of inconsistencies across previous studies. An event-type methodology is employed by using daily CRSP data. Department of Labor Form 5500 data are used in conjunction with disclosures about the nature of the replacement plan to estimate worker losses at the time of termination. In addition, estimates from a censored bivariate probit model are incorporated to control for market anticipation of the termination. The results suggest that stock returns at the time of termination are affected by the form of the replacement plan and, to a lesser degree, market anticipation. The results are consistent with investors' using future salaries to value pension liabilities prior to termination. Analysis of the replacement plan and comparison of the reversion amount to the theoretically derived wealth transfer suggest that inconsistencies across prior studies principally result from including firms that continue defined-benefit coverage after termination. In addition, the results help explain why previous studies documented small changes in market value relative to the reversion amount.]

A recent article in this journal (Hsieh, Ferris, and Chen, 1990) presents evidence demonstrating that financially distressed firms that terminate overfunded pension plans experience significantly positive abnormal returns, while nondistressed terminating firms experience returns not different from zero. The article concludes from this evidence that the market regards the property rights to excess assets as residing fully with the sponsoring firm prior to termination, particularly when the sponsoring firm is not financially distressed. Accordingly, the reporting requirements of Statement of Financial Accounting Standards (SFAS) No. 88, which require immediate recognition of gains resulting from termination, are inconsistent with the market's view of the ownership rights to excess plan assets. Similarly, the article suggests that the excise tax imposed on asset reversions is “punitive” because property rights to fund assets resided with the company prior to termination. This paper questions three aspects of the Hsieh, Ferris, and Chen article: (1) the plausibility of the theory explaining differential reaction to the announcement to terminate for distressed and nondistressed firms; (2) the effect of the distressed/nondistressed classification criteria, event date specification, and event window length on the results; and (3) the appropriateness of using the empirical results, if reliable, to evaluate accounting treatment or federal tax policy. Résumé. Dans un récent article paru dans cette même publication, Hsieh, Ferris et Chen (1990) soumettaient des faits démontrant que les entreprises en difficulté financière qui mettent fin à un régime de retraite surprovisionné enregistrent des rendements anormaux positifs importants, tandis que les entreprises qui mettent fin à un régime de retraite sans être en difficulté financière enregistrent des rendements qui ne sont pas différents de zéro. De là, les auteurs concluaient que le marché estime que les droits à l'excédent d'actif appartiennent exclusivement à l'entreprise responsable du régime avant la cessation, en particulier lorsque cette dernière n'est pas en difficulté financière. Par conséquent, les exigences de la norme SFAS No. 88 en matière d'information à fournir, qui prévoient la constatation immédiate du produit de la cessation du régime, ne sont pas conformes à la façon de voir du marché relativement aux droits à l'excédent d'actif du régime. De la même façon, selon les auteurs, la taxe d'accise imposée en cas de retour de l'actif est “punitive”, étant donné que les droits à l'actif du régime appartenaient à l'entreprise avant la cessation du régime. Les auteurs s'interrogent ici sur trois aspects de l'article de Hsieh, Ferris, et Chen: 1) la pertinence de la théorie expliquant la réaction marginale à l'annonce de la cessation d'un régime pour les entreprise qui sont en difficulté financière et celles qui ne le sont pas; 2) l'incidence sur les résultats des critères permettant de classer les entreprises comme étant en difficulté financière ou ne l‘étant pas, de la précision de la date de l’événement et de la longueur de la période pré‐post relative à l‘événement; et 3) l'opportunité de l'utilisation des résultats empiriques, s'ils sont fiables, pour évaluer le traitement comptable ou la politique fiscale fédérale.

[The purpose of this study is to determine the prevalence, magnitude and timing of retiree health care benefit reductions and to identify determinants of the benefit-reduction decisions. Three explanations for these benefit reductions are examined: (1) increased contracting cost caused by the financial reporting consequences of SFAS No. 106, (2) financial weakness independent of SFAS No. 106 and (3) firm-specific increases in retiree health care costs. Strong support for the increased contracting cost hypothesis is found after controlling for industry, financial weakness and firm-specific changes in retiree health care costs. However, the results also indicate that firms cutting benefits are financially weaker and have higher retiree health care costs at the time benefits are reduced. Therefore, SFAS No. 106 cannot be viewed as the sole cause of the health care benefit reductions.]

Analyzes stock returns associated with the announcement to terminate overfunded defined-benefit pension plans. Evaluation of the use of the reversion amount as a measure of wealth transfer from plan participants to shareholders; Resolution of inconsistencies across prior studies regarding the existence of a significant positive market reaction at the termination announcement.