An Investigation of the Market Effects of Overfunded Pension Plan Termination

Using data from a sample of 34 overfunded pension plan terminations from the 1980-1985 period, a study investigates the effect of excess asset reversion on the market wealth of bondholders and stockholders. The results indicate that significant positive abnormal returns accrue to both bondholders and stockholders, but only when the corporate sponsor experiences an adverse change in financial condition. This finding suggests several inferences: 1. The arginal value of reverted pensio assets is apparently highest for sponsors experiencing financial adversity. 2. Because abnormal returns were not observed for all plan terminations, the value of the reverted assets for sponsors experiencing no adverse change in financial condition must have been previously impounded in security prices. 3. Because both classes of security holders experienced wealth gains when the sponsor faced financial adversity, the termination event apparently yielded an increase to the sponsor's total firm value.