OVERFUNDED DEFINED BENEFIT PENSION PLAN SETTLEMENTS WITHOUT ASSET REVERSIONS

This study examines why firms settle their overfunded defined benefit pension plans. Under the new accounting standard (FASB Statement No. 88), companies 'settling' their overfunded pension plan can immediately recognize a portion of deffered pension gain as current earnings. Focusing on settlement transactions unaccompanied by asset reversions, we examine financial characteristics of settlement firms, including earnings, debt covenants, management incentive compensation, and firms' risk and financial structures. Our results suggest that firms undertake settlement to offset a decline in earnings and mitigate restrictive debt covenant constraints. However, a settlement firm's systematic risk (beta) does not change after settlement. © 1991.