How Does the Market Value Healthcare Liabilities?

Abstract

The aim of this paper is to analyze the effect of medical health benefits liabilities on firms' share prices. First, we find that investors tend to over-react to healthcare obligations, with a one percent increment in healthcare liabilities leading to a more than one per cent decline in the market value of firms' equity. Secondly, as real market values cannot be measured without error, differences between market and firms' own valuations are to be expected. For healthcare obligations, however, the particular set of assumptions used in their estimation could intensify this disparity. To test this possibility, we try to measure the degree of market reliability in financial information provided by companies in their balance sheet. We find evidence to support the fact that other post-retirement employee benefits (OPEB) estimations are not as reliable as accounting measures for pension.

Keywords: post-retirement benefits obligations other than pensions, healthcare plans, pension plans, accounting

JEL Classification: C33, M41, I10