Pension Information, Human Capital, and Firm Valuation

Abstract

We re-evaluate the evidence on the association between pension information and firm valuation by considering alternate theoretical constructs that can be captured in pension information. Economically, pension plans, especially defined benefit plans, but also defined contribution plans, are more likely to be employed by firms whose employees are more skilled and difficult to replace. Thus, the pension cost, assets, and liabilities, can act as proxies not only for the normal costs, assets, and liabilities that they are supposed to represent, but also for the omitted human capital asset that forms part of the unrecognized intangible assets of the firm. Additionally, within the context of normal asset and liability recognition, we consider the possibility that the true present value of defined benefit pension liabilities is less than that recorded because in difficult economic times the ability of defined benefit plans to bind the employee to the firm, results in employees making wage concessions such that the expected value of the pension liability across all possible states of the world is less than that recorded by accountants. We provide empirical evidence supporting the human capital hypothesis; the influence of pension cost for defined contribution firms and service cost for defined benefit firms on price and returns is consistent with them capturing human capital rather than employee compensation. However, after controlling for the human capital captured in the service cost for defined benefit plans the pension reported asset and liability behave as pure assets and liabilities.