Equity market reactions to increased balance sheet volatility

41 Pages Posted: 19 Dec 2022

See all articles by Christian Barthelme

Christian Barthelme

WHU - Otto Beisheim School of Management

Paraskevi Vicky Kiosse

University of Exeter Business School - Department of Accounting

Thorsten Sellhorn

Ludwig-Maximilians-Universitaet (LMU) Munich; TRR 266 Accounting for Transparency

Date Written: December 16, 2022

Abstract

We document equity market reactions to an exogenous increase in expected balance sheet volatility – the time-series variation in equity book values. Our study is motivated by recent trends in accounting standard setting towards a ‘balance sheet approach’, which increases balance sheet volatility. Prior work has established theoretically that increased balance sheet volatility can potentially affect firm value through opposite channels: by reducing contracting usefulness while increasing transparency. Using the revised pension accounting standard IAS 19R as our empirical setting, we find negative average stock price reactions to events increasing the likelihood of an accounting change that would amplify balance sheet volatility for affected firms. In the cross-section, these abnormal event returns vary predictably, i.e., are incrementally more (less) negative for firms with relatively larger defined benefit plans (firms with higher pension investment risk). These findings are consistent with increased balance sheet volatility imposing greater net costs on firms with larger exposure, reflecting the lower contracting usefulness of volatile equity book values. In contrast, the positive market reactions for firms with higher pension investment risk suggest benefits emanating from increased transparency. These results are robust to a number of sensitivity tests and collectively suggest that investors anticipate the firm value effects of increased balance sheet volatility in ways predicted by accounting theory.

Keywords: pension accounting, balance sheet volatility, contracting, transparency

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JEL Classification: G11, G30, G32, G38, M48

Suggested Citation

Barthelme, Christian and Kiosse, Paraskevi Vicky and Sellhorn, Thorsten, Equity market reactions to increased balance sheet volatility (December 16, 2022). TRR 266 Accounting for Transparency Working Paper Series No. 112, Available at SSRN: https://ssrn.com/abstract=4304645 or http://dx.doi.org/10.2139/ssrn.4304645

Christian Barthelme (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Paraskevi Vicky Kiosse

University of Exeter Business School - Department of Accounting ( email )

Exeter, EX4 4PU
United Kingdom

Thorsten Sellhorn

Ludwig-Maximilians-Universitaet (LMU) Munich ( email )

Ludwigstr. 28 RG IV
Munich, Bavaria 80539
Germany
+49(0)89-21806264 (Phone)
+49(0)89-21806327 (Fax)

HOME PAGE: http://www.rwp.bwl.uni-muenchen.de/personen/professoren/sellhorn/index.html

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

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