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Information Content Of Changes In Pension Plan Funding Status And Long-Term Debt

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  • Karen C. Castro-González

Abstract

This study investigates whether investors efficiently incorporate changes in defined benefit pension plan information in stock prices. The sample is comprised of public US companies with available data from 1980 to 2005. Fama and French three factor (1993) and four factor models results reveal that the market inefficiently incorporates changes in defined benefit pension plan information. The results suggest that investors are not paying enough attention to the implications of the changes in funding status for future earnings and cash flows. Investors’ reactions to changes in defined benefit pension plan information were compared to reactions to changes in long-term debt account ratios. The results reveal that the market is also inefficient incorporating changes in long-term debt information. Hedge-portfolio tests are performed to verify if there is an opportunity to outperform the market by identifying market inefficiencies. The hedge-portfolio results support the notion that the market overprices firms that have the most negative changes in funding ratio and increases in long-term debt ratio.

Suggested Citation

  • Karen C. Castro-González, 2012. "Information Content Of Changes In Pension Plan Funding Status And Long-Term Debt," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 6(1), pages 1-14.
  • Handle: RePEc:ibf:ijbfre:v:6:y:2012:i:1:p:1-14
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    File URL: http://www.theibfr2.com/RePEc/ibf/ijbfre/ijbfr-v6n1-2012/IJBFR-V6N1-2012-1.pdf
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    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Coronado, Julia & Mitchell, Olivia S. & Sharpe, Steven A. & Blake Nesbitt, S., 2008. "Footnotes aren't enough: the impact of pension accounting on stock values," Journal of Pension Economics and Finance, Cambridge University Press, vol. 7(3), pages 257-276, November.
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    4. Hirshleifer, David & Kewei Hou & Teoh, Siew Hong & Yinglei Zhang, 2004. "Do investors overvalue firms with bloated balance sheets?," Journal of Accounting and Economics, Elsevier, vol. 38(1), pages 297-331, December.
    5. Konan Chan & Louis K. C. Chan & Narasimhan Jegadeesh & Josef Lakonishok, 2006. "Earnings Quality and Stock Returns," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1041-1082, May.
    6. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    7. Asthana, Sharad, 2008. "Earnings management, expected returns on pension assets, and resource allocation decisions," Journal of Pension Economics and Finance, Cambridge University Press, vol. 7(2), pages 199-220, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    long-term debt; defined benefits pension plan; stock prices; four factor model;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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