Are Potential Effects of SFAS 158 Associated with Firms’ Decisions to Freeze Their Defined Benefit Pension Plans?

This paper investigates whether the recent clustering of defined benefit (DB) pension plan freeze announcements is motivated at least in part by accounting concerns due to the Financial Accounting Standards Board's (FASB) pending adoption of Statement of Financial Accounting Standards No. 158 (SFAS 158). We examine freeze announcements during 2001-2006, a period which is marked by increasing sentiment for sweeping pension accounting reform starting with the passage of FRS 17 in the UK and culminating in the adoption of SFAS 158 in the U.S. Using logistic regression models, we compare 147 ldquo;freeze firmsrdquo; with a matched sample of firms that did not announce a DB plan freeze. Our models control for other possible motivations behind the DB plan freeze decision, particularly (1) as a potential response to stricter contribution requirements under the Pension Protection Act of 2006 and (2) managers' professed rationale of improving the firm's competitive position. We find strong support for our hypothesis that the potential SFAS 158 impact is significantly associated with firms' decisions to freeze their DB plans. Our study contributes to research on 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