How do Analysts Process Pension Information?

Abstract:     
This paper evaluates whether analysts can see through the financial statement, so as to value defined benefit (DB) pension funding status based on economic values of pension assets and obligations. The literature is divided on whether earnings forecasts and stock prices reflect economic pension information. Previous studies correlate pension variables with analysts’ earnings forecasts or stock prices. The analysts’ information processing has previously been a “black box.” We opened this black box by interviewing and physically inspecting the analysts’ spreadsheets to determine how they treated pensions in their valuation. By choosing the firms with highest probability of earning management in pensions (most abnormal pension assumptions), there will be a reward for the analysts to use correct pension information. However, we found that analysts do not incorporate relevant pension information into their valuation spreadsheets. Thus our study provides further evidence that skilled and influential market participants, the analysts, do not efficiently incorporate information into their forecasts and stock valuations.

Keywords: Pensions, Analysts, Valuation, Recognition, Disclosure, Earning Management, Financial Reporting Standards

JEL Classifications: D8, G14, J26, M41

Working Paper Series