Pension Terminations and Freezes - An Event Study of Abnormal Returns to Gauge Market Response

Open Access
Sharpe, Maria G
Area of Honors:
Bachelor of Science
Document Type:
Thesis Supervisors:
  • Chris Muscarella, Thesis Supervisor
  • Brian Spangler Davis, Honors Advisor
  • Brian Spangler Davis, Faculty Reader
  • pension
  • freeze
  • finance
  • event study
Over the past two decades, private sector pensions have shifted dramatically away from defined benefit pension plans in favor of defined contribution plans such as 401K’s and 403b’s. Nevertheless, while existing literature has answered many of the big questions surrounding this change, very little has been done to determine how the capital markets feel about pension freezes. The purpose of this study was to try to answer that question. Using an event study methodology, I found that on the day of announcement firms that froze their DB pension plans saw on average a 0.63% abnormal return. My findings further show that markets react immediately to the news of a freeze. Under the presumption that pension freezes reduce long-term costs and shift risk to employees, it is fair to say that on average pension freezes enhance firm value.