Stock Market Sensitivity to U.K. Firms' Pension Discounting Assumptions

26 Pages Posted: 9 Apr 2012

See all articles by Paul J. M. Klumpes

Paul J. M. Klumpes

Nottingham Trent University

Kevin McMeeking

University of Exeter Business School - Department of Finance

Date Written: Fall 2007

Abstract

New U.K. pension accounting regulations significantly increase the exposure of the balance sheets of U.K. firms to volatilities in pension fund valuations. We examine whether the abnormal returns of firms that voluntarily used market‐based pension discount rates are significantly different from the abnormal returns of industry‐matched pair samples of firms that retained traditional cost‐based valuation assumptions during the period surrounding the release of the related exposure draft. We also examine the interest rate sensitivity of stock price returns over the 4‐year period before and after the announcement date. Consistent with our hypotheses, U.K. stock price returns incorporate the effect of unexpected interest rate changes on sources of pension earnings for firms that voluntarily switched to market‐based assumptions but do not incorporate these effects for firms that did not switch. These results suggest that unexpected changes in interest rates have a differential effect on a firm's sources of pension, financial, and core earnings.

Suggested Citation

Klumpes, Paul J.M. and McMeeking, Kevin, Stock Market Sensitivity to U.K. Firms' Pension Discounting Assumptions (Fall 2007). Risk Management and Insurance Review, Vol. 10, Issue 2, pp. 221-246, 2007. Available at SSRN: https://ssrn.com/abstract=2036118 or http://dx.doi.org/10.1111/j.1540-6296.2007.00116.x

Paul J.M. Klumpes (Contact Author)

Nottingham Trent University ( email )

Burton Street
Nottingham NG1 4BU, NG1 4LN
United Kingdom

Kevin McMeeking

University of Exeter Business School - Department of Finance ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom
01392 263206 (Phone)
01392 263210 (Fax)

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