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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]
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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

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