Wharton Pension Research Council Working Papers
 

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

Julia Coronado, Barclay's Capital
Steven A. Sharpe, Federal Reserve Board
Olivia S. Mitchell, The Wharton School, University of Pennsylvania
S. Blake Nesbitt, The Wharton School, University of Pennsylvania

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.

 

Date Posted: 07 August 2019