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

28 Pages Posted: 15 Jan 2009

See all articles by Olivia S. Mitchell

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

Julia Lynn Coronado

Barclays Capital

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 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 a very misleading picture of pension finances. The more pertinent information on pension finances is relegated to footnotes, but this 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.

Keywords: Pension assets, pension accounting, value-relevance, FAS 87

JEL Classification: G21

Suggested Citation

Mitchell, Olivia S. and Sharpe, Steven A. and Nesbitt, S. Blake and Coronado, Julia Lynn, Footnotes Aren't Enough: The Impact of Pension Accounting on Stock Values (January 1, 2008). FEDS Working Paper No. 2008-04, Available at SSRN: https://ssrn.com/abstract=1327060 or http://dx.doi.org/10.2139/ssrn.1327060

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 )

3302 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Steven A. Sharpe (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2875 (Phone)
202-452-3819 (Fax)

S. Blake Nesbitt

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Julia Lynn Coronado

Barclays Capital ( email )

200 Park Ave.
New York, NY 10166
United States

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