Abstract
I investigate whether the recognition of previously disclosed accounting items is associated with a change in market valuation after Financial Accounting Standard (FAS) 158 requires defined benefit (DB) pension sponsors to recognize the net funded status (NFS). This question is especially relevant given the current debate whether regulators should require the recognition of operating leases. I investigate whether the NFS reflects economic information that is used in the valuation process. I find that sponsors of underfunded DB plans are associated with higher valuation after the NFS is recognized, consistent with a reduction in investors’ estimation risk. I find that the cost of capital of non DB sponsors increases by 70 basis points more than it does for DB sponsors in the post period, perhaps attributable to increased financial reporting transparency after the recognition event. My inferences are stronger when I incorporate the effect of analyst following into my estimation model.
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