Value-relevance of pension transition adjustments and other comprehensive income components in the adoption year of SFAS No. 158

Abstract

In the present study, we examine the value-relevance of pension transition adjustments and other comprehensive income (OCI) components in the initial adoption year of Statement of Financial Accounting Standard (SFAS) 158—Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. Using a sample of 697 Standard and Poor (S&P) firms with the fiscal year ending on December 31, 2006, we perform several cross-sectional regression analyses to test the value-relevance of transition adjustments and OCI components in presence of various earnings measures. The results indicate that there is a negative relationship between both the level and change in stock returns and the magnitude of pension transition adjustments. We also find earnings measures and some OCI components are significantly associated with stock returns. When analyzed separately, we find our main results are mostly confined to the sample large S&P 500 firms. We do not find any result for the S&P mid-cap and small-cap firms. The overall results suggest the stock market negatively reacts to the adverse impact of SFAS #158 pension transition adjustments on net worth and future cash flows when the impact is substantial in its magnitude in dollar terms. The study further provides useful insight into the information processing by documenting that the market evaluates accounting information more effectively when such information is recognized in the financial statements rather than disclosed only in the financial footnotes.