The Value Relevance of Pension Fair Values and Uncertainty

53 Pages Posted: 19 Oct 2009 Last revised: 25 Oct 2012

See all articles by Jan D. Fasshauer

Jan D. Fasshauer

Justus-Liebig-University of Giessen

Martin Glaum

WHU - Otto Beisheim School of Management

Date Written: Oct 25, 2012

Abstract

This study examines the value relevance of fair-value-based pension information using data from German companies that have adopted IFRS or US-GAAP. German companies do not tradition-ally fund pension plans externally. They therefore report large net pension obligations on their balance sheets. This provides an interesting setting to study the effects of uncertainty on the value relevance of pension-obligation fair values. We find that information related to financial positions is more closely associated with stock prices than pension-cost information. Second, fair-value estimates of companies’ pension obligations are more value relevant than the recognized net pen-sion liabilities that are smoothed because of the application of the corridor method. Third, actuar-ial gains and losses that under the current smoothing-oriented pension accounting standards re-main unrecognized in balance sheets have value relevance beyond that of recognized net pension liabilities. Fourth, we find that the value relevance of pension amounts is affected by the degree of uncertainty surrounding their estimation. Specifically, fair-value estimates seem to be more value relevant than smoothed estimates when the uncertainty surrounding the estimation is rela-tively high and thus information asymmetries and estimation risks are high. Not much difference exists in the value relevance of both types of estimates when the uncertainty is less pronounced.

Keywords: Pension Accounting, Fair Value, Value Relevance, Bootstrap Procedure

JEL Classification: G14, M40, M41

Suggested Citation

Fasshauer, Jan D. and Glaum, Martin, The Value Relevance of Pension Fair Values and Uncertainty (Oct 25, 2012). Available at SSRN: https://ssrn.com/abstract=1491237 or http://dx.doi.org/10.2139/ssrn.1491237

Jan D. Fasshauer

Justus-Liebig-University of Giessen ( email )

Liebig Strasse 64
D-35394 Giessen, 35394
Germany

HOME PAGE: http://wiwi.uni-giessen.de/ma/dat/Glaum/Jan_Fa%DFhauer/

Martin Glaum (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar
Germany
+49 261 - 6509-315 (Phone)

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