Pension Deficits and Corporate Financial Policy: Does Accounting Transparency Matter?

Abstract

We study changes in financial policies following a regulatory shock to the accounting transparency of defined benefit pension plans. We estimate the hidden pension deficits of French companies subject to mandatory IAS 19 adoption in 2005 using disclosures of early adopters of IAS 19. We find that financially risky companies reporting unexpectedly high pension deficits on first-time IAS 19 adoption subsequently reduce leverage and incur higher cost of debt. Our results suggest that in the absence of transparency the credit market anticipates off-balance sheet pension deficits. However, the introduction of the more transparent IAS 19 regime allows the credit market to correct estimation errors. Our study is one of the first to show that the greater transparency offered by IFRS has negative economic consequences for some companies.

Keywords: accounting transparency, defined benefit pension plans, capital structure, off- balance sheet liabilities, credit market

JEL Classification: G15, G32, M4