Footnotes Aren't Enough: The Impact of Pension Accounting on Stock Values

27 Pages Posted: 11 Jan 2008 Last revised: 2 Jan 2023

See all articles by Julia Lynn Coronado

Julia Lynn Coronado

Barclays Capital

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Steven A. Sharpe

Board of Governors of the Federal Reserve System

S. Blake Nesbitt

University of Pennsylvania - The Wharton School

Multiple version iconThere are 2 versions of this paper

Date Written: January 2008

Abstract

Some 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, taken at face value, can provide very misleading picture of pension finances. The more pertinent information on pension finances is relegated to footnotes, but might not receive much attention from portfolio managers. But dramatic swings in the financial conditions of large DB plans around the turn of the decade focused widespread attention on pension accounting practices, and dissatisfaction with current accounting standards has recently prompted the Financial Accounting Standards Board (FASB) to take up a project revamp 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.

Suggested Citation

Coronado, Julia Lynn and Mitchell, Olivia S. and Sharpe, Steven A. and Nesbitt, S. Blake, Footnotes Aren't Enough: The Impact of Pension Accounting on Stock Values (January 2008). NBER Working Paper No. w13726, Available at SSRN: https://ssrn.com/abstract=1082745

Julia Lynn Coronado (Contact Author)

Barclays Capital ( email )

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New York, NY 10166
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Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

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National Bureau of Economic Research (NBER)

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Steven A. Sharpe

Board of Governors of the Federal Reserve System ( email )

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202-452-3819 (Fax)

S. Blake Nesbitt

University of Pennsylvania - The Wharton School ( email )

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Philadelphia, PA 19104-6365
United States

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