Did Pension Plan Accounting Contribute to a Stock Market Bubble?
During the 1990s the assets of corporate defined-benefit pension plans ballooned with the booming stock market. Under current accounting guidelines, the result was a substantial but stealthy boost to sponsoring firms' profits. This study assesses the extent to which investors were fooled by pension accounting. It finds that stock prices reflected not the fair market value of sponsoring firms' net pension assets, as reported in the footnotes to their financial statements, but rather some capitalization rate on pension cost accruals in the income statement. Additional tests indicate that the market values a firm's pension earnings no differently from its core earnings, suggesting that pension earnings are often overvalued. This failure to differentiate induces large valuation errors for many firms, although this does not seem to translate into aggregate overvaluation, at least not before 2001, when falling stock prices and interest rates slashed pension net asset values but not pension earnings.
Volume (Year): 34 (2003)
Issue (Month): 1 ()
|Contact details of provider:|| Postal: 1775 Massachusetts Ave NW, Washington DC 20036|
Phone: (202) 797-6000
Fax: (202) 797-6004
Web page: http://www.brookings.edu/economics.aspx
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Irwin Tepper, 1981. "Taxation and Corporate Pension Policy," NBER Working Papers 0661, National Bureau of Economic Research, Inc.
- Zvi Bodie & John B. Shoven, 1983. "Financial Aspects of the United States Pension System," NBER Books, National Bureau of Economic Research, Inc, number bodi83-1, October.
- Tepper, Irwin, 1981. "Taxation and Corporate Pension Policy," Journal of Finance, American Finance Association, vol. 36(1), pages 1-13, March.
- Alicia H. Munnell & Nicole Ernsberger (assistant), 1987. "Pension contributions and the stock market," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 3-14.
- Feldstein, Martin & Seligman, Stephanie, 1981.
"Pension Funding, Share Prices, and National Savings,"
Journal of Finance,
American Finance Association, vol. 36(4), pages 801-824, September.
- Martin Feldstein & Stephanie Seligman, 1980. "Pension Funding, Share Prices, and National Saving," NBER Working Papers 0509, National Bureau of Economic Research, Inc.
- Head, S.J. & Adkins, D.R. & Cairns, A.J.G. & Corvesor, A.J. & Cule, D.O. & Exley, C.J. & Johnson, I.S. & Spain, J.G. & Wise, A.J., 2000. "Pension Fund Valuations and Market Values," British Actuarial Journal, Cambridge University Press, vol. 6(01), pages 55-141, June.
- Zvi Bodie & Jay O. Light & Randall Morck, 1987. "Funding and Asset Allocation in Corporate Pension Plans: An Empirical Investigation," NBER Chapters,in: Issues in Pension Economics, pages 15-48 National Bureau of Economic Research, Inc.
- Zvi Bodie & Jay O. Light & Randall Morck & Robert A. Taggart, Jr., 1984. "Funding and Asset Allocation in Corporate Pension Plans: An Empirical Investigation," NBER Working Papers 1315, National Bureau of Economic Research, Inc.
- Jeremy I. Bulow & Randall Morck & Lawrence H. Summers, 1987. "How Does the Market Value Unfunded Pension Liabilities?," NBER Chapters,in: Issues in Pension Economics, pages 81-110 National Bureau of Economic Research, Inc.
- Jeremy I. Bulow & Randall Morck & Lawrence H. Summers, 1985. "How Does the Market Value Unfunded Pension Liabilities?," NBER Working Papers 1602, National Bureau of Economic Research, Inc.
- Davidson, Russell & MacKinnon, James G, 1981. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Econometrica, Econometric Society, vol. 49(3), pages 781-793, May.
- Russell Davidson & James G. MacKinnon, 1980. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Working Papers 378, Queen's University, Department of Economics.
- Alan L. Gustman & Olivia S. Mitchell & Thomas L. Steinmeier, 1994. "The Role of Pensions in the Labor Market: A Survey of the Literature," ILR Review, Cornell University, ILR School, vol. 47(3), pages 417-438, April.
- Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, vol. 3(3), pages 183-193, June.
- Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 1992. "The market valuation implications of net periodic pension cost components," Journal of Accounting and Economics, Elsevier, vol. 15(1), pages 27-62, March.
- Steven A. Sharpe, 2002. "How does the market interpret analysts' long-term growth forecasts?," Finance and Economics Discussion Series 2002-7, Board of Governors of the Federal Reserve System (U.S.).
- Steven A. Sharpe, 2004. "How Does the Market Interpret Analysts' Long-Term Growth Forecasts?," Finance and Economics Discussion Series 2002-07, Board of Governors of the Federal Reserve System (U.S.).