Good Disclosure Doesn’t Cure Bad Accounting – or Does it? Evaluating the Case for SFAS 158

Advances in Accounting, Forthcoming

34 Pages Posted: 19 Jun 2010 Last revised: 14 Dec 2011

See all articles by Cathy Beaudoin

Cathy Beaudoin

University of Vermont

Nandini Chandar

Drexel University - Department of Accounting and Tax

Edward M. Werner

Rutgers, The State University of New Jersey

Date Written: June 17, 2010

Abstract

This paper investigates whether the newly required recognition of pension asset and liability amounts under SFAS 158 is incrementally value relevant in its first adoption year (2006) relative to the same amounts which were previously only disclosed to both equity investor and credit rating agency decision makers. In equity valuation models, we use a sample of 878 firms (1,756 firm years) offering DB plans in 2005 (disclosure year) and 2006 (recognition year), and find no incremental association with market prices of newly recognized amounts under SFAS 158 over the same information that was disclosed pre-SFAS 158. Our credit ratings tests, using a sample of 428 DB firms (856 firm years) for 2005 and 2006 also show no differential impact of recognition over disclosure. Overall, we find that equity investors price the formerly disclosed pension liability while credit rating agencies do not, regardless of whether such information is recognized or disclosed in the financial statements. Our results are consistent with efficiency in both equity and credit markets with respect to pension information and suggest that SFAS 158 has not changed the way market participants use pension-related financial statement information.

Keywords: Recognition vs. disclosure, pension accounting, SFAS 158, defined benefit plans

JEL Classification: M41, C12

Suggested Citation

Beaudoin, Cathy and Chandar, Nandini and Werner, Edward M., Good Disclosure Doesn’t Cure Bad Accounting – or Does it? Evaluating the Case for SFAS 158 (June 17, 2010). Advances in Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1626381 or http://dx.doi.org/10.2139/ssrn.1626381

Cathy Beaudoin

University of Vermont ( email )

212 Kalkin Hall
Burlington, VT 05405-0158
United States

Nandini Chandar

Drexel University - Department of Accounting and Tax ( email )

Philadelphia, PA 19104
United States

Edward M. Werner (Contact Author)

Rutgers, The State University of New Jersey ( email )

Camden, NJ 08102
United States
(856) 225-6978 (Phone)

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