The Economic Consequences of SFAS No. 158

Abstract

This study examines the economic consequences of Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS No. 158 requires the funded status of postretirement benefit plans be reported on the face of the balance sheet. The study adds to the debate regarding the equivalence of recognition versus disclosure and to the ongoing discussion of postretirement benefit reporting. The study finds that managers responded to the requirement to recognize previously disclosed net pension and postretirement benefit obligations by first lobbying against the standard’s implementation and then by attempting to mitigate its negative impact by increasing the discount rate in subsequent periods. Firms with larger SFAS No. 158 balance sheet adjustments and more volatile pension assets and obligations were more likely to lobby and increase discount rates. The study further documents a negative stock price reaction around the release of the SFAS No. 158 exposure draft. The study finds that the market reaction is positively related to the SFAS No. 158 adjustment and it is driven by the OPEB adjustment rather than the pension adjustment. The findings presented in the study have important implications for the recognition versus disclosure debate, because they document a significant market reaction to the relocation of already disclosed information from the financial statements footnotes to the balance sheet.