Pay Me Now (and Later): Bonus Boosts Before Pension Freezes and Executive Departures

Passive insider trading before pension freezes

“…One alternative interpretation of the observed increase in net purchases is that insiders sell less for liquidity reasons because of higher compensation. For example, Stefanescu et al (2018) show that before pension freezes, executives tend to boost their bonuses, which is an input variable in the pension benefit formula, to increase their pension benefits. However, our subsample analysis of different insider groups indicates that this is not likely to be the case because senior executives who have less liquidity needs due to higher bonus income do not exhibit reduced sales, whereas non‐senior‐executive insiders show reduced sales, even though they cannot manipulate their bonuses and, thus, should not cut their liquidity‐driven sales.…”

“…Third, unlike other corporate events, such as earnings announcements and mergers and acquisitions, corporate executives can rely on alternatives to benefit from pension freezes instead of engaging in prohibitive insider trading. For example, Stefanescu et al (2018) show that senior executives boost annual bonuses to raise their pension benefits before pension freezes and executive retirements. This gives rise to the possibility that some insiders may use ways other than trading stocks to benefit from pension plan switches.…”

“…Table 1 reports summary statistics for the key variables of the firms that had at least one DB plan over our sample period. We follow Stefanescu et al (2018) and define Prefreeze as a firm-year dummy variable equal to 1 when the firm freezes its pension plan(s) in the next year, and 0 otherwise. Hence, even for freeze firms, the variable can equal either 0 or 1, depending on whether there is any plan freeze in the following year.…”

“…Second, some insiders (i.e., top executives) behave opportunistically before pension freezes. Stefanescu et al (2018) find that top executives manipulate annual bonuses (an input in the pension benefit formula) to substantially increase their future pension benefits in anticipation of DB plan freezes. Typically, pensions are collectively bargained for by unions, which often confidentially strike agreements with employers (see, e.g., Maher, 2008), and insider pensioners are notified at least 45 days before the effective date of the freeze (Levine & Golumbic, 2014).…”

“…However, anecdotal evidence shows that pension freezes are normally not disclosed to rank-and-file employees until the freeze decision has been made and announced. 2 Stefanescu et al (2018) point out that executives and some key employees also participate in pension freeze negotiations, which usually last for an extended period, and when both parties get close to a resolution, insiders fully anticipate the plan freeze. Therefore, we hypothesize that insiders have foreknowledge of pension freezes and may engage in self-dealing trading activities before public pension freeze announcements.…”