Good Disclosure Doesn’t Cure Bad Accounting – or Does it? Evaluating the Case for SFAS 158

Abstract

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.