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


  • Hieu V. Phan,

  • Shantaram P. Hegde

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    • Hieu V. Phan is an Assistant Professor of Finance at the University of Massachusetts at Lowell, MA. Shantaram P. Hegde is a Professor of Finance at the University of Connecticut in Storrs, CT.

  • We appreciate the helpful comments from Bill Christie (Editor), three anonymous referees, Assaf Eisdorfer, Carmelo Giaccotto, Joseph Golec, John Harding, Sigitas Karpavicius, Jung-Min Kim, Sanjay Kudrimoti, Alfred Liu, Marcel Prokopczuk, Susan Thorp, as well as session participants at the 2009 International Conference at Iqfai Business School (Bangalore), 2009 and 2010 Financial Management Association International Annual Meetings, 2009 Eastern Finance Association Annual Meeting, 2009 Southwestern Finance Association Annual Meeting, 2011 FINCON at Management Development Institute (Gurgaon), and seminar participants at the University of Connecticut, Massey University, University of Adelaide, and Victoria University of Wellington. A previous version of this paper was titled “Impact of Change in Retirement Benefit Plans on Firm's Investment, Value, and Risk.” All errors remain the sole responsibility of the authors.


We study the impact of freezing defined benefit (DB) pension plans and replacing them with defined contribution (DC) plans on liquidity, financial leverage, investment, and market value of a sample of firms over 2001-2008. We find evidence that the pension freeze tends to attenuate the drain on corporate liquidity and relieve the pressure to borrow to pay for mandatory contributions (MCs) associated with underfunded DB plans. Although investors seem to favor the pension freeze as evidenced by positive announcement abnormal stock returns, there is little reliable evidence that the freeze increases investment efficiency and long-term stock performance.