Hostname: page-component-586b7cd67f-2plfb Total loading time: 0 Render date: 2024-11-22T08:16:09.887Z Has data issue: false hasContentIssue false
  • English
  • Français

Footnotes aren't enough: the impact of pension accounting on stock values*

Published online by Cambridge University Press:  02 September 2008

JULIA CORONADO ,
OLIVIA S. MITCHELL ,
STEVEN A. SHARPE  and
S. BLAKE NESBITT
JULIA CORONADO
Affiliation:
Barclays Capital, 200 Park Ave, New York, NY 10166, USA. Tel: 212-412-1476. e-mail: [email protected]
OLIVIA S. MITCHELL
Affiliation:
Pension Research Council, Department of Insurance/Risk Management, The Wharton School, University of Pennsylvania, 3000 SH-DH, 3620 Locust Walk, Philadelphia, PA 19104-6218, USA. Tel: 215-746-5701. Fax: 215-898-0310. e-mail: [email protected]
STEVEN A. SHARPE
Affiliation:
Division of Research and Statistics, Federal Reserve Board, 20th and C Streets, NW, Washington, DC 20551, USA. Tel: 202-452-2875. e-mail: [email protected]
S. BLAKE NESBITT
Affiliation:
Pension Research Council, The Wharton School, University of Pennsylvania, 3000 SH-DH, 3620 Locust Walk, Philadelphia, PA 19104-6218, USA. Tel: 310-486-4871. e-mail: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

Recent research has suggested that companies with defined benefit (DB) pensions are sometimes significantly misvalued by the market. This is because the measures of pension cost and pension net liabilities embedded in financial statements can provide a very misleading picture of pension finances, if taken at face value. The more pertinent information on pension finances is relegated to footnotes, which may not receive much attention from portfolio managers. Dramatic swings in the financial conditions of large DB plans around the turn of the decade focused attention on pension accounting practices, and growing dissatisfaction with current accounting standards has prompted the Financial Accounting Standards Board (FASB) to launch a project revamping DB pension accounting. Arguably, the increased attention should have made investors wise to the informational problems, thereby eliminating systematic mispricing in recent years. We test this proposition and conclude that investors continued to misvalue DB pensions, inducing sizable valuation errors in the stock of many companies. Our findings suggest that FASB's current reform efforts could substantially aid the market's ability to value firms with DB pensions.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 7 , Issue 3 , November 2008 , pp. 257 - 276
Copyright
Copyright © 2008 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aaronson, Stephanie and Julia, Coronado (2005) ‘Are Firms or Workers Behind the Shift Away from DB Pension Plans?’ Finance and Economics Discussion Series 2005-17, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, DC.Google Scholar
Bergstresser, Daniel, Mihir, Desai, and Joshua, Rauh (2006) Earnings manipulation, pension assumptions and managerial investment decisions. Quarterly Journal of Economics, 121(1), February: 157–195.Google Scholar
Black, Fischer (1980) The Tax Consequences of Long-Run Pension Policy. Financial Analysts' Journal (July–August): 21–30.CrossRefGoogle Scholar
Blitzer, David M., Robert, E. Friedman, and Howard, Silverblatt (2001) Measures of Corporate Earnings. Standard & Poor's, New York, NY.Google Scholar
Bulow, Jeremy I., Robert, Morck, and Lawrence, Summers (1987) How Does the Market Value Unfunded Pension Liabilities? In Issues in Pension Economics, edited byBodie, Zvi, Shoven, John and Wise, David. Chicago, IL: University of Chicago Press.Google Scholar
Cardinale, Mirko (2005) Corporate Pension Funding and Credit Spreads. Watson Wyatt Technical Paper.Google Scholar
Coronado, Julia and Steven, A. Sharpe (2003) Did Pension Plan Accounting Contribute to a Stock Market Bubble? BPEA (1): 323–359.Google Scholar
Ehrhardt, John W. and Paul, C. Morgan (2008) 2007 Gains Reversed in First Quarter of 2008. Milliman 2008 Pension Funding Study. April. New York: Milliman.Google Scholar
Feldstein, Martin S. and Robert, Morck (1983) Pension Funding Decisions, Interest Rate Assumptions, and Share Prices. In Financial Aspects of the United States Pension System, edited by Bodie, Zvi and John, B. Shoven. Chicago, IL: University of Chicago Press.Google Scholar
Feldstein, Martin S. and Stephanie, Seligman (1981) Pension Funding, Share Prices and National Savings. Journal of Finance (September): 801–824.CrossRefGoogle Scholar
Financial Accounting Standards Board (1985) Statement of Financial Accounting Standards No. 87: Employers' Accounting for Pensions. FASB, Stamford, Ct. Dec.Google Scholar
Financial Accounting Standards Board (2003). Statement of Financial Accounting Standards No. 132: Employers' Disclosures about Pensions and Other Postretirement benefits – an Amendment of FASB Statements No. 87, 88, and 106. FASB, Stamford, Ct. Dec.Google Scholar
Feltham, G. and Ohlson, J. (1995) Valuation and Clean Surplus Accounting for Operating and Financial Activities. Contemporary Accounting Research 11(2): 689–732.CrossRefGoogle Scholar
Financial Accounting Standards Board (2006) Statement of Financial Accounting Standards No. 158: Employers' Accounting for Defined Benefit Pensions and Other Postretirement Plans – An Amendment of FASB Statements No. 87, 88, 106, and 132. FASB, Stamford, Ct. Sept.Google Scholar
Franzoni, Francesco and Jose, Marin (2006a) Pension Plan Funding and Stock Market Efficiency. Journal of Finance, 61(2): 921–956.Google Scholar
Franzoni, Francesco and Jose, Marin (2006b) Portable Alphas from Pension Mispricing. Journal of Portfolio Management (Summer): 44–56.CrossRefGoogle Scholar
Gold, Jeremy (2005) Accounting/actuarial Bias Enables Equity Investment by Defined Benefit Pension Plans. North American Actuarial Journal, (July): 1–25.CrossRefGoogle Scholar
Hamilton, L. C. (1991) How Robust is Robust Regression? Stata Technical Bulletin, 2: 21–26.Google Scholar
Hann, Rebecca, Frank, Heflin, and Subramanyam, K. R. (2007) Fair-value Pension Accounting. Working paper, USC. Journal of Accounting and Economics, 44(3): 328–358.CrossRefGoogle Scholar
Jin, Li, Robert, C. Merton, and Zvi, Bodie (2006) Do a Firm's Equity Returns Reflect the Risk of its Pension Plan? Journal of Financial Economics, 81(1) July: 1–26.CrossRefGoogle Scholar
McGill, Dan M., Kyle, N. Brown, John, J. Haley, and Sylvester, J. Schieber (1996) Fundamentals of Private Pensions. Philadelphia, PA: University of Pennsylvania Press.Google Scholar
Moran, M. and Cohen, A. J. (2005) Pension Accounting: FASB Finally Moving Forward. Goldman Sachs Group, Inc.Google Scholar
Picconi, Marc (2006) The Perils of Pensions: Does Pension Accounting Lead Investors and Analysts Astray? Accounting Review, 81(4): 925–955.Google Scholar
Sharpe, William F. (1976) Corporate Pension Funding Policy. Journal of Financial Economics, 3(2): 183–193.CrossRefGoogle Scholar
Tepper, Irwin (1981) Taxation and Corporate Pension Policy. Journal of Finance, 36(1): 1–13.CrossRefGoogle Scholar
Thompson, Samuel B. (2006) Simple Formulas for Standard Errors that Cluster by Both Firm and Time. Mimeo, Department of Economics, Harvard University.Google Scholar
Winkelvoss, H. (1997) Pension Mathematics with Numerical Illustrations. Chicago: Irwin.Google Scholar
Zion, David and Bill, Carcache (2002) The Magic of Pension Accounting. Credit Suisse First Boston, September.Google Scholar