The Impact of Pension Assumptions on Firm Value

Abstract:     
I examine the association between disclosed financial accounting data and firm value, while incorporating the effect of managerial discretion in reporting those data. I focus on the assumptions used to compute a firm's pension liability. I find that firm values are consistent with analysts being aware of the likely influence of reporting incentives on managers' choices of assumptions. Analysts appear to be aware of the incentives associated with contracting considerations and where they infer that such incentives have induced managers to choose obligation-reducing assumptions, they treat $1 of reported obligation as if it were an obligation of more than $1. These findings suggest that analysts recognize managers' use of assumptions that are not justified by the firm's operating environment and that they discount the effect of those assumptions on the disclosed accounting numbers.

Keywords: Financial reporting, pensions, managerial, opportunistic behavior, financial analyst, market value

JEL Classifications: M40, M41, G23, G14

Working Paper Series