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Do Changes In Pension Plan Accounting Standards Result In Better Market Valuation?

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  • Karen C. Castro-González,

Abstract

This study investigates if changes in U.S. accounting standards result in a better assessment of firms’ pension commitments as reflected in stock prices. Fama and French three factor (1993) model results reveal that the market inefficiently incorporates defined benefit pension plan information for the three accounting standard related periods. In contrast to Franzoni and Marín (2006), and Fama and French (1993), the returns were estimated starting the fourth month after the end of fiscal year t. The results suggest that investors are not paying enough attention to the implications of the underfunding for future earnings and cash flows. Apparently, the changes in accounting standards do not alter the way investors evaluate this type of obligation. Hedge-portfolio tests are performed to verify if there is an opportunity to outperform the market by identifying weaknesses in the incorporation of information. Tests’ results corroborate that the market overprices firms that have severely negative funding status.

Suggested Citation

  • Karen C. Castro-González,, 2011. "Do Changes In Pension Plan Accounting Standards Result In Better Market Valuation?," Accounting & Taxation, The Institute for Business and Finance Research, vol. 3(1), pages 71-80.
    • Handle: RePEc:ibf:acttax:v:3:y:2011:i:1:p:71-80
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    More about this item

    Keywords

    Pension plans; accounting standards; information content;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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