The perils of pensions: Does pension accounting lead investors and analysts astray

This paper investigates the ability of analysts and investors to fully incorporate the information contained in pension footnotes. I find that both these groups fail to efficiently integrate currently available pension information into their forecasts and firm valuations. These findings indicate that information that is complex in nature or less accessible to investors and analysts is less likely to be fully assimilated. They also suggest that the increased disclosure mandated by FASB Exposure Draft 1025-200 may be an incomplete response to investor concerns to the extent that the new requirements do not address information processability. This paper also provides insight into the extent of analyst sophistication and helps define the types of information they are likely to overlook. Additionally, I find evidence that firms may be capitalizing on investors' incomplete processing of pension information to help manage earnings. Specifically, I demonstrate that firms may raise their expected rates of return on plan assets in order to help bolster earnings when they anticipate bad news in the coming year.