Annuity Buyouts: An Empirical Analysis

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.