TY - UNPB

T1 - How does the market price pension accruals?

AU - Kiosse, Vicky

AU - Lubberink, Martien

AU - Peasnell, Ken

PY - 2007

Y1 - 2007

N2 - We use a cross-sectional valuation model that distinguishes between the operating and financial activities of the firm to examine the repercussions of three main alternative measures of pension expense. The GAAP Method recognizes a smoothed net pension expense, the NETCOST Method includes the excess of interest cost over the actual return on pension plan assets, if and only if this number is positive, and the FV Method substitutes the fair value in place of the smoothed pension expense. Three alternative fair value estimates of pension expense are examined: the first includes the expected return on plan assets and fair value other costs; the second includes the actual return on plan assets and net fair value other costs; the third includes the expected and the unexpected return on plan assets, along with net fair value other costs. Results from OLS regressions are consistent with the GAAP Method being relevant while the market appears to value the unexpected return included in the FV Method. Additional analyses from jack-knife (out-of-sample) regressions confirm the OLS findings. Further, we show that the multiples assigned to the alternative measures of pension expense differ based on the funding status of pension plans. The results are robust to various sensitivity checks.

AB - We use a cross-sectional valuation model that distinguishes between the operating and financial activities of the firm to examine the repercussions of three main alternative measures of pension expense. The GAAP Method recognizes a smoothed net pension expense, the NETCOST Method includes the excess of interest cost over the actual return on pension plan assets, if and only if this number is positive, and the FV Method substitutes the fair value in place of the smoothed pension expense. Three alternative fair value estimates of pension expense are examined: the first includes the expected return on plan assets and fair value other costs; the second includes the actual return on plan assets and net fair value other costs; the third includes the expected and the unexpected return on plan assets, along with net fair value other costs. Results from OLS regressions are consistent with the GAAP Method being relevant while the market appears to value the unexpected return included in the FV Method. Additional analyses from jack-knife (out-of-sample) regressions confirm the OLS findings. Further, we show that the multiples assigned to the alternative measures of pension expense differ based on the funding status of pension plans. The results are robust to various sensitivity checks.

KW - Pension expense

KW - value relevance

KW - defined benefit pension plans

M3 - Working paper

T3 - Accounting and Finance Working Paper Series

BT - How does the market price pension accruals?

PB - The Department of Accounting and Finance

CY - Lancaster University

ER -