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Article

Annuity Buyouts: An Empirical Analysis

David R. Cantor, Frederick M. Hood and Mark L. Power
Special Issues Fall 2017, 2017 (1) 10-20; DOI: https://doi.org/10.3905/sp.2017.2017.1.010
David R. Cantor
is a director in the Pension Risk Management & Investments Practice at PricewaterhouseCoopers in New York, NY
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Frederick M. Hood III
is a senior lecturer of finance in the College of Business at Iowa State University in Ames, Iowa
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Mark L. Power
is the principal financial group finance professor in the College of Business at Iowa State University in Ames, Iowa
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Abstract

Over the past several years, numerous companies have chosen to execute annuity buyouts as a method of de-risking their pension plans. The prevailing wisdom is that shareholders reward these transactions through increases in the share price when the transaction is executed. This logic is commonly employed by advisors and consultants to prompt plan sponsors to do an annuity buyout. We employ an event-study methodology to empirically test how the stock market reacts to annuity buyout announcements. We also examine whether the market reaction is different for small firms, those with high levels of credit risk, and large relative deal sizes. While our sample size is limited, we find for risky companies that the market views an annuity purchase as a negative signal and the share price is not rewarded. For large investment grade companies, the market views an annuity purchase more positively and the share price earns a small, but temporary, premium.

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Special Issues: 2017 (1)
Pension Risk Longevity Guide
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Annuity Buyouts: An Empirical Analysis
David R. Cantor, Frederick M. Hood, Mark L. Power
Special Issues Sep 2017, 2017 (1) 10-20; DOI: 10.3905/sp.2017.2017.1.010

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Annuity Buyouts: An Empirical Analysis
David R. Cantor, Frederick M. Hood, Mark L. Power
Special Issues Sep 2017, 2017 (1) 10-20; DOI: 10.3905/sp.2017.2017.1.010
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  • Article
    • Abstract
    • PENSION RISK MANAGEMENT: BUY-INS AND BUYOUTS
    • OVERVIEW OF ANNUITY BUYOUT MARKET
    • DE-RISKING AND SHAREHOLDER VALUE
    • DATA AND METHODS
    • RESULTS
    • SUMMARY
    • ENDNOTES
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  • Editor’s Letter
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