Equity valuation effects of the pension protection act of 2006

John L. Campbell, Dan S. Dhaliwal, William C. Schwartz

Research output: Contribution to journalArticle

16 Scopus citations

Abstract

We investigate the equity valuation effects of the Pension Protection Act of 2006 (PPA 2006). The PPA 2006 has two main provisions: (1) firms must fully fund their pension plans within seven years (previously allowed 30 years to fund 90 percent of the pension liability) and (2) firms receive a tax deduction for contributions up to 150 percent of the pension liability (previously 100 percent). After controlling for the effects of SFAS 158, growth opportunities, the cost of external funds, and other information released during our sample period, we examine pension firms abnormal returns surrounding key dates in the legislative process leading to the adoption of the PPA 2006. First, we find a mean negative abnormal return of) 4.20 percent during the period in which the PPA 2006 was first voted on by Congress. The mean (median) firm in our sample experienced a $310 million ($60 million) decline in market capitalization. Second, we find that the valuation effect was more negative for firms with larger unfunded pension liabilities and larger capital expenditure requirements, while firms with higher marginal tax rates experienced a positive effect. Third, we find no evidence of differential valuation effects for firms in different at risk categories as defined by the PPA 2006. Finally, we find a significant number of pension freezes occurred during our sample period. Our results are stronger when excluding these firms from our sample.

Original languageEnglish (US)
Pages (from-to)469-536
Number of pages68
JournalContemporary Accounting Research
Volume27
Issue number2
DOIs
StatePublished - Jun 1 2010

Keywords

  • Defined benefit plans
  • Pension Protection Act of 2006
  • Pension accounting
  • Pension liabilities

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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