Hostname: page-component-8448b6f56d-t5pn6 Total loading time: 0 Render date: 2024-04-23T15:35:21.067Z Has data issue: false hasContentIssue false
  • English
  • Français

Disclosure versus recognition: the value relevance of pensions

Published online by Cambridge University Press:  14 October 2021

Luca Larcher
Luca Larcher*
Affiliation:
School of Economics and Finance, Queen Mary, University of London, Mile End Road, London E14NS, UK
*
*Corresponding author. Email: l.larcher@qmul.ac.uk
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper compares how pension obligations impact the market value of United States corporations under two accounting regimes. Using a sample of firms that disclosed pension liabilities under Statement of Financial Accounting Standards (SFAS) No. 87 from 2001 to 2005 and recognized them under SFAS No. 158 from 2006 to 2014, I find that equity market participants take into account the net position of the pension fund only if it is recognized on the sponsor's balance sheet, thus mispricing the pension deficit/surplus under the disclosure regime. I also provide evidence suggesting that investors' perception of pension deficits/surpluses changed with the introduction of SFAS No. 158 in 2006.

Keywords

Defined benefit pensionsdisclosurerecognitionSFAS No. 158valuationG32M41
Type
Article
Information
Journal of Pension Economics & Finance , Volume 22 , Issue 1 , January 2023 , pp. 132 - 159
Copyright
Copyright © The Author(s), 2021. Published by Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ahmed, AS, Kilic, E and Lobo, GJ (2006) Does recognition versus disclosure matter? Evidence from value-relevance of banks’ recognized and disclosed derivative financial instruments. The Accounting Review 81, 567–588.Google Scholar
Barth, ME, Beaver, WH and Landsman, WR (1992) The market valuation implications of net periodic pension cost components. Journal of Accounting and Economics 15, 27–62.Google Scholar
Barth, ME, Beaver, WH and Landsman, WR (2001) The relevance of the value relevance literature for financial accounting standard setting: another view. Journal of Accounting and Economics 31, 77–104.Google Scholar
Barth, ME, Clinch, G and Shibano, T (2003) Market effects of recognition and disclosure. Journal of Accounting Research 41, 581–609.Google Scholar
Beaudoin, C, Chandar, N and Werner, EM (2011) Good disclosure doesn't cure bad accounting – or does it?: evaluating the case for SFAS 158. Advances in Accounting 27, 99–110.CrossRefGoogle Scholar
Bernard, V and Schipper, K (1994) ‘Recognition and disclosure in financial reporting’, Working paper. University of Chicago and University of Michigan.Google Scholar
Blankespoor, E, de Haan, E and Marinovic, I (2020) Disclosure processing costs, investors’ information choice, and equity market outcomes: a review. Journal of Accounting and Economics 70, 101344.Google Scholar
Brown, JR and Pennacchi, GG (2016) Discounting pension liabilities: funding versus value. Journal of Pension Economics and Finance 15, 254–284.CrossRefGoogle Scholar
Bulow, JI, Morck, R and Summers, LH (1987) How does the market value unfunded pension liabilities? In BBodie, Z, Shoven, JB and Wise, DA (eds), Issues in Pension Economics. Chicago, IL: University of Chicago Press, pp. 81–110.Google Scholar
Cocco, JF (2014) Corporate pension plans. Annual Review of Financial Economics 6, 163–184.CrossRefGoogle Scholar
Coronado, JL and Sharpe, SA (2003) Did pension plan accounting contribute to a stock market bubble? Brookings Papers on Economic Activity 2003, 323–371.CrossRefGoogle Scholar
Coronado, J, Mitchell, OS, Sharpe, SA and Blake Nesbitt, S (2008) Footnotes aren't enough: the impact of pension accounting on stock values. Journal of Pension Economics and Finance 7, 257–276.CrossRefGoogle Scholar
Davis-Friday, PY, Buky Folami, L, Liu, C-S and Fred Mittelstaedt, H (1999) The value relevance of financial statement recognition vs. disclosure: evidence from SFAS No. 106. The Accounting Review 74, 403–423.Google Scholar
Davis-Friday, PY, Liu, C-S and Mittelstaedt, H (2004) Recognition and disclosure reliability: evidence from SFAS No. 106. Contemporary Accounting Research 21, 399–429.Google Scholar
Dearman, DT and Shields, MD (2005) Avoiding accounting fixation: determinants of cognitive adaptation to differences in accounting method. Contemporary Accounting Research 22, 351–384.CrossRefGoogle Scholar
Dechow, PM, Hutton, AP and Sloan, RG (1999) An empirical assessment of the residual income valuation model. Journal of Accounting and Economics 26, 1–34.Google Scholar
FASB, Financial Accounting Standards Board (1985) Statement of Financial Accounting Standards No. 87: Employers’ Accounting for Pensions. Stamford, CT: FASB, December.Google Scholar
FASB, Financial Accounting Standards Board (2006) Statement of Financial Accounting Standards No. 158: Employers’ Accounting for Defined Benefit Pensions and Other Postretirement Plans – An Amendment of FASB Statements No. 87, 88, 106, and 132. Stamford, CT: FASB, September.Google Scholar
Feldstein, M and Morck, R (1983) Pension funding decisions, interest rate assumptions and share prices. In Bodie, Z and Shoven, JB (eds), Financial Aspects of the U.S. Pension System. Chicago, IL: University of Chicago Press.Google Scholar
Feldstein, M and Seligman, S (1981) Pension funding, share prices, and national savings. The Journal of Finance 36, 801–824.Google Scholar
Feltham, GA and Ohlson, JA (1995) Valuation and clean surplus accounting for operating and financial activities. Contemporary Accounting Research 11, 689–731.Google Scholar
Franzoni, F and Marin, JM (2006) Pension plan funding and stock market efficiency. The Journal of Finance 61, 921–956.Google Scholar
Frederickson, JR, Hodge, FD and Pratt, JH (2006) The evolution of stock option accounting: disclosure, voluntary recognition, mandated recognition, and management disavowals. The Accounting Review 81, 1073–1093.Google Scholar
Fried, AN and Davis-Friday, PY (2013) Economic consequences of mandatory GAAP changes: the case of SFAS No. 158. Advances in Accounting 29, 186–194.CrossRefGoogle Scholar
Hann, RN, Heflin, F and Subramanayam, KR (2007a) Fair-value pension accounting. Journal of Accounting and Economics 44, 328–358.Google Scholar
Hann, RN, Lu, YY and Subramanyam, KR (2007b) Uniformity versus flexibility: evidence from pricing of the pension obligation. The Accounting Review 82, 107–137.CrossRefGoogle Scholar
Hirshleifer, D and Teoh, SH (2003) Limited attention, information disclosure, and financial reporting. Journal of Accounting and Economics 36, 337–386.Google Scholar
Hobson, JL and Kachelmeier, SJ (2005) Strategic disclosure of risky prospects: a laboratory experiment. The Accounting Review 80, 825–846.CrossRefGoogle Scholar
Jan, C-L and Ou, JA (2011) Negative-book-value firms and their valuation. Accounting Horizons 26, 91–110.CrossRefGoogle Scholar
Kisser, M, Kiff, J and Soto, M (2017) Do managers of U.S. defined benefit pension plan sponsors use regulatory freedom strategically? Journal of Accounting Research 55, 1213–1255.Google Scholar
Koonce, L, McAnally, ML and Mercer, M (2005) How do investors judge the risk of financial items? The Accounting Review 80, 221–241.Google Scholar
Michels, J (2017) Disclosure versus recognition: inferences from subsequent events. Journal of Accounting Research 55, 3–34.CrossRefGoogle Scholar
Mitra, S and Hossain, M (2009) Value-relevance of pension transition adjustments and other comprehensive income components in the adoption year of SFAS No. 158. Review of Quantitative Finance and Accounting 33, 279–301.Google Scholar
Petersen, MA (2009) Estimating standard errors in finance panel data sets: comparing approaches. The Review of Financial Studies 22, 435.Google Scholar
Picconi, M (2006) The perils of pensions: does pension accounting lead investors and analysts astray? The Accounting Review 81, 925–955.Google Scholar
Schipper, K (2007) Required disclosures in financial reports. The Accounting Review 82, 301–326.Google Scholar
Yu, K (2013) Does recognition versus disclosure affect value relevance? Evidence from pension accounting. The Accounting Review 88, 1095–1127.Google Scholar