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.     

TRADE OPENNESS: AN AUSTRALIAN PERSPECTIVE

Australia's external trade is relatively low compared with the size of its economy. Indeed, Australia's openness ratio (exports plus imports as a proportion of GDP) in 2002 was the third-lowest among the 30 OECD countries. This paper seeks to understand Australia's low openness by analysing the empirical determinants of aggregate country trade. We present an equation for country openness which explains a substantial amount of the cross-country variation. The most important explanators of openness are population and a measure of distance to potential trade partners. Countries with larger populations trade less, as do countries that are relatively more remote. Furthermore, after controlling for trade policy there is little evidence of a positive correlation between openness and economic development. The openness equation suggests that Australia's level of trade is relatively close to what would be expected. The most important factors in explaining Australia's low openness ratio are its large geographic size and distance to the rest of the world.     

THE RISK PREMIUM FOR EQUITY: IMPLICATIONS FOR RESOURCE ALLOCATION,WELFARE AND POLICY*

Analysis of the equity premium puzzle has focused on private sector capital markets. The object of this paper is to consider the welfare and policy implications of each of the broad classes of explanations of the equity premium puzzle. As would be expected, the greater the deviation from the first‐best outcome implied by a given explanation of the equity premium puzzle, the more interventionist are the implied policy conclusions. Nevertheless, even explanations of the equity premium puzzle consistent with a general consumption‐based asset pricing model have important welfare and policy implications.     

Privatization Policies and Public Enterprise: A Survey*

This paper surveys and analyzes the economic literature on ‘privatization’ policies, restricting coverage to policies designed to improve the operating efficiency of public sector enterprises through increased exposure to competitive market forces. These include asset sales, liberalization (or deregulation) and franchising. The objectives, incentives and constraints of public and private enterprises are examined, and evidence on their comparative performance is analyzed. Public sector revenue effects from asset sale are also explored. On the basis of these considerations, the paper concludes that liberalization is an important ingredient in any policy package designed to improve the operating efficiency of public sector enterprises. Asset sale may enhance the beneficial impact of deregulation but asset sale in the absence of deregulation is unlikely to improve efficiency, and may introduce additional market distortions. Franchising is seen as an appropriate mechanism for privatization when the market is inherently monopolistic and when the government desires to retain control over output and/or price.     

Subordinated Market Index Models: A Comparison

The paper compares various processes subordinated to the Wiener process tomodel the leptokurtic characteristics of index returns. Empirical analysisis performed on the Dow Jones and Nikkei 225 indexes. A good model to capturethe typical tail behaviour of these indexes turns out to be a long Studentt distributed one.     

Tax Law Improvement in Australia and the UK: The Need for a Strategy for Simplification

In both Australia and the UK, programmes are under way to simplify tax legislation by rewriting it. This paper demonstrates that tax simplification is a complicated concept and concludes that sustainable improvement is unlikely to be achieved if reform is limited only to linguistic changes. Tax law is complicated because there are powerful pressures that tend to increase the complexity of modern tax systems and these should also be considered in any simplification programme. In addition, tax simplification may be promoted by the greater use of purposive legislation — that is, legislation drafted in terms of general principles rather than much more comprehensive legislation designed to deal with every likely possibility. The paper examines the progress of the Australian Tax Law Improvement Project and argues that what is needed is a strategy for tax simplification that is incorporated into the process of generating tax policy itself. JEL classification: H20.     

The Dynamics of Financially Constrained Arbitrage

We develop a model in which financially constrained arbitrageurs exploit price discrepancies across segmented markets. We show that the dynamics of arbitrage capital are self‐correcting: following a shock that depletes capital, returns increase, which allows capital to be gradually replenished. Spreads increase more for trades with volatile fundamentals or more time to convergence. Arbitrageurs cut their positions more in those trades, except when volatility concerns the hedgeable component. Financial constraints yield a positive cross‐sectional relationship between spreads/returns and betas with respect to arbitrage capital. Diversification of arbitrageurs across markets induces contagion, but generally lowers arbitrageurs' risk and price volatility.