A note on securities market response to pension fund termination*

Abstract. A recent article in this journal (Hsieh, Ferris, and Chen, 1990) presents evidence demonstrating that financially distressed firms that terminate overfunded pension plans experience significantly positive abnormal returns, while nondistressed terminating firms experience returns not different from zero. The article concludes from this evidence that the market regards the property rights to excess assets as residing fully with the sponsoring firm prior to termination, particularly when the sponsoring firm is not financially distressed. Accordingly, the reporting requirements of Statement of Financial Accounting Standards (SFAS) No. 88, which require immediate recognition of gains resulting from termination, are inconsistent with the market's view of the ownership rights to excess plan assets. Similarly, the article suggests that the excise tax imposed on asset reversions is “punitive” because property rights to fund assets resided with the company prior to termination. This paper questions three aspects of the Hsieh, Ferris, and Chen article: (1) the plausibility of the theory explaining differential reaction to the announcement to terminate for distressed and nondistressed firms; (2) the effect of the distressed/nondistressed classification criteria, event date specification, and event window length on the results; and (3) the appropriateness of using the empirical results, if reliable, to evaluate accounting treatment or federal tax policy. Résumé. Dans un récent article paru dans cette même publication, Hsieh, Ferris et Chen (1990) soumettaient des faits démontrant que les entreprises en difficulté financière qui mettent fin à un régime de retraite surprovisionné enregistrent des rendements anormaux positifs importants, tandis que les entreprises qui mettent fin à un régime de retraite sans être en difficulté financière enregistrent des rendements qui ne sont pas différents de zéro. De là, les auteurs concluaient que le marché estime que les droits à l'excédent d'actif appartiennent exclusivement à l'entreprise responsable du régime avant la cessation, en particulier lorsque cette dernière n'est pas en difficulté financière. Par conséquent, les exigences de la norme SFAS No. 88 en matière d'information à fournir, qui prévoient la constatation immédiate du produit de la cessation du régime, ne sont pas conformes à la façon de voir du marché relativement aux droits à l'excédent d'actif du régime. De la même façon, selon les auteurs, la taxe d'accise imposée en cas de retour de l'actif est “punitive”, étant donné que les droits à l'actif du régime appartenaient à l'entreprise avant la cessation du régime. Les auteurs s'interrogent ici sur trois aspects de l'article de Hsieh, Ferris, et Chen: 1) la pertinence de la théorie expliquant la réaction marginale à l'annonce de la cessation d'un régime pour les entreprise qui sont en difficulté financière et celles qui ne le sont pas; 2) l'incidence sur les résultats des critères permettant de classer les entreprises comme étant en difficulté financière ou ne l‘étant pas, de la précision de la date de l’événement et de la longueur de la période pré-post relative à l‘événement; et 3) l'opportunité de l'utilisation des résultats empiriques, s'ils sont fiables, pour évaluer le traitement comptable ou la politique fiscale fédérale.     

Stock Market Reactions to SFAS No. 96: Evidence from Early Bank Adopters

Statement of Financial Accounting Standards (SFAS) No. 96, “Accounting for Income Taxes,” issued by the Financial Accounting Standards Board (FASB) in December 1987 changed accounting for income tax recognition and accrual. The original deadline for implementation of SFAS No. 96 was December 15, 1988, and earlier adoption was encouraged. This study examines empirically the stock price impact of four pertinent announcement dates regarding SFAS No. 96 for 19 banks that adopted the statement in late 1987 and early 1988. Our results suggest that these early bank adopters have different characteristics from other banks that cause them to benefit from the changes in accounting for deferred taxes and explain their voluntary adoption of the standard.     

Do Small Banks have an Advantage in Lending? An Examination of Risk-Adjusted Yields on Business Loans at Large and Small Banks

Consolidation in the banking industry has sparked concern about the survival of small banks, particularly as it relates to the availability of credit to small businesses. However, if small banks have an advantage in processing credit information, compared to large banks, they should continue to survive in a competitive environment. We evaluate risk-adjusted commercial loan yields (gross yields less net charge-offs and the risk-free rate of return) at small and large banks for the period of 1996 through 2001. Our primary finding is that, after controlling for market concentration, cost of funds, and a variety of other factors that might influence yields, smaller banks earn greater risk-adjusted yields than larger banks. This result suggests that small banks make better choices from the available small business loans and is consistent with the notion that these banks have an information advantage in evaluating credit.     

Rethinking the role of NCBs in the EMU

Five years after the introduction of unified monetary policy in the EMU, some member countries are wondering whether they have ceded too much of their policy-making powers. The fact that National Central Banks no longer carry out sizable expansionary open market or foreign exchange market operations suggests that they face substantially reduced abilities to set economic policy.This paper demonstrates that, in fact, very little power has been yielded: on the fiscal front, the force of such policy initiatives is enhanced by the fixity of the exchange rate. On the monetary front, we show that there is an observational equivalence between all Central Bank actions under fixed exchange rates. This implies that the authorities retain the same amount of policy flexibility as before. So long as they use an alternative form of policy initiative, carrying out what previously would have been characterized as sterilized foreign exchange market operations, their ability to influence the macro performance of their economy is undiminished.