Title

Defined Benefit Pension Sponsors & Market Prices: Early Evidence from Pension Accounting Reform

Date of Completion

January 2010

Keywords

Business Administration, Accounting

Degree

Ph.D.

Abstract

I explore recognition versus disclosure issues in US capital markets by investigating the association between stock price and accounting information for defined benefit (DB) pension plan sponsors after pension accounting reform from Financial Accounting Standard (FAS) 158, "Employers' Accounting for Defined Benefit Pension and Other Postemployment Plans." I investigate whether the recognition of net pension assets (i.e., the net funded status, or NFS) on the balance sheet reflects information that is used by investors. ^ I find an asymmetric relationship between market prices and the disclosed NFS depending on whether the plan is over- or underfunded. I find that underfunded plans are associated with lower market prices before pension reform and overfunded plans have no significant relationship with market prices, perhaps due to the small number of overfunded firms in my sample. ^ After the NFS is recognized, I find that its association with market prices changes for firms with underfunded plans and I find that the recognized NFS is associated with higher market prices than when it is disclosed. I find that the benefits of recognizing the net funded status accrue primarily to underfunded firms, which is consistent with a reduction in investor uncertainty resulting in lower estimation risk. In support of this conclusion, I find that the cost of capital of non DB sponsors increases by 70 basis points more than it does for non DB sponsors in the post FAS 158 period. This is consistent with the expected benefits of increased financial reporting transparency as a result of the recognition event. ^ In a similar manner, I investigate the association between the accumulated other comprehensive income component from pensions and other postemployment benefits and market prices before and after FAS 158, however I fail to find significant results after pension accounting reform using this estimation model. ^ In additional analysis I test whether my results could be due to managerial opportunism in the selection of actuarial assumptions to estimate the value of the recognized PBO or from the existence of financial analysts following the firm. ^