Contrasting the Information Demands of Equity- and Debt-Holders: Evidence From Pension Liabilities
55 Pages Posted: 9 Mar 2021
Date Written: November 1, 2020
In the setting of defined-benefit pension liabilities, we hypothesize that equity and debt investors value these liabilities differently. As expected, we find that investors’ valuations of equity more closely align with a going concern perspective that emphasizes the long-term funding needs of pension plans. In contrast, as expected, we find that investors’ pricing of short-term and unsecured debt more closely aligns with a settlement perspective that emphasizes pension termination costs. For both equity and debt securities, the settlement (going concern) perspective dominates for short-duration (long-duration) pensions. Overall, our evidence suggests that equity and debt investors perceive complex liabilities in predictably different ways that are consistent with their differing information demands, which in turn vary with the characteristics of the obligation.
Keywords: value-relevance, credit-relevance, pension liabilities, discount rates, actuarial assumptions
JEL Classification: M41
Suggested Citation: Suggested Citation