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Purpose – The purpose of this paper is to examine, in the context of movement towards a fair‐value based pension accounting standard, the value relevance of both recognized and disclosed pension accounting information.Design/methodology/approach – Using hand‐collected data from Fortune 200 firms, this study includes both recognized and disclosed pension accounting measures (aggregated and disaggregated) in multivariate regression models. The investigation employs tests of relative and incremental value relevance in both equity and credit rating evaluation contexts.Findings – Findings indicate that pension information recognized under a fair‐value‐based accounting model is no more or less value relevant than pension information recognized under the SFAS 87 model. Also, the disclosed off‐balance sheet pension amount is incrementally value relevant for determining share prices. However, it is not value relevant for the credit rating decision.Research limitations/implications – This study tests the relevance ...

PurposeThe purpose of this paper is to examine whether the significant clustering of defined benefit (DB) pension plan freeze announcements during 2001‐2006 is motivated at least in part by accounting concerns due to the Financial Accounting Standards Board's pending adoption of Statement of Financial Accounting Standards No. 158 (SFAS 158).Design/methodology/approachUsing logistic regression models, the paper compares 147 “freeze firms” with a matched sample of firms that did not announce a DB plan freeze. Empirical models control for other DB plan motives including as a response to stricter contribution requirements under the Pension Protection Act of 2006 and improving the firm's competitive position.FindingsThe potential SFAS 158 impact is significantly associated with firms' decisions to freeze their DB plans. Firm profitability is also significantly associated with the freeze decision. However, there is no significant association between cash flow positions or pension plan contributions and the freeze decision.Research limitations/implicationsIt is possible that economic conditions adversely affecting the funded status of DB plans also motivate the freeze decision. While this study controls for the economic environment, economic factors could exacerbate the potential effect of SFAS 158.Originality/valueThis paper considers potential effects of accounting policy by examining its influence on real management actions and has consequences for a variety of stakeholders including investors, creditors, and, importantly, pension beneficiaries and workers, as DB plans represent implicit contracts between firms and their employees.

This study examines how financial statement management via pension plan assumption choices, a simple mechanism through which management can manipulate financial reports, is related to corporate governance effectiveness. Based on our sample of Taiwanese listed companies, which are characterized by a high degree of ownership concentration and an emerging economy, we find that the deviation between control rights and cash flow rights, the number of board seats held by the ultimate controller, and board independence are significantly related to more aggressive expected rate of return on pension assets assumption choices. We also find that when the ultimate controller also serves as the CEO, this conflict of interest is associated with aggressive pension assumptions related to the PBO. In addition, institutional shareholders appear to play an important monitoring role, which can mitigate opportunistic pension rate assumption choices. Our findings indicate that the opacity inherent in pension accounting guidance is likely exacerbated by poor corporate governance. It informs the current debate over measurement and reporting discretion for DB pension plans specifically as well as the more general debate over managing financial statements in the presence of accounting discretion.

This paper investigates whether the newly required recognition of pension asset and liability amounts under SFAS 158 is incrementally value relevant in its first adoption year (2006) relative to the same amounts which were previously only disclosed to both equity investor and credit rating agency decision makers. In equity valuation models, we use a sample of 878 firms (1,756 firm years) offering DB plans in 2005 (disclosure year) and 2006 (recognition year), and find no incremental association with market prices of newly recognized amounts under SFAS 158 over the same information that was disclosed pre-SFAS 158. Our credit ratings tests, using a sample of 428 DB firms (856 firm years) for 2005 and 2006 also show no differential impact of recognition over disclosure. Overall, we find that equity investors price the formerly disclosed pension liability while credit rating agencies do not, regardless of whether such information is recognized or disclosed in the financial statements. Our results are consistent with efficiency in both equity and credit markets with respect to pension information and suggest that SFAS 158 has not changed the way market participants use pension-related financial statement information.

This study investigates the association between pension accounting information and both firm value and credit ratings. My findings indicate that fair-value-based pension accounting information is not more evaluation relevant (often termed value relevant in prior literature relating specifically to the equity valuation decision) than pension information recognized in the financial statements under SFAS 87. In fact, I find SFAS 87 information to be more evaluation relevant in models with composite pension variables. However, once I disaggregate the variables, the performance of fair-value data improves, which suggests that the loss in evaluation relevance is due mainly to the aggregation of transitory components (i.e. actuarial and investment gains and losses) with more persistent pension cost components. Similar to previous research, incremental evaluation relevance tests of pension cost component variables suggest that the market may overvalue pension components relative to regular earnings components. Moreover, my results suggest that financial statement users, particularly credit rating analysts, focus on pension income statement information, also indicative of overvaluation and weaker risk assessments. Should the U.S. continue to shift toward a fair-value based pension accounting standard, recognizing transitory elements of pension cost separately from net income (perhaps as part of comprehensive income) can mitigate any loss in evaluation relevance.