The impact of OBRA on shareholder wealth

Market-return data and a multivariate regression model are used to investigate the impact of the Omnibus Budget Reconciliation Act of 1987 (OBRA) on the wealth of shareholders of firms sponsoring overfunded and underfunded pension plans during the period surrounding the passage of OBRA. Assuming semistrong market efficiency, a reduction in the pension insurance effect associated with the passage of OBRA was hypothesized to have a negative impact on the security prices of all plan sponsors. In general, the market reacted unfavorably to sponsors of both overfunded and underfunded defined-benefit pension plans when OBRA was introduced. However, the market reaction varied as a function of the funding-level change during the period preceding passage of the Act. Firm-specific financial variables were also used in a stepwise regression analysis to investigate whether selected financial variables could explain negative abnormal returns observed during the legislative period. We found that earnings per share and the short-term debt-coverage ratio explained up to 19.4% of the negative abnormal returns for the underfunded sample. However, no significant explanatory variables were identified for the overfunded sample.