The value relevance of pension accounting information: SFAS 87 vs. fair value

This study investigates the association between recognized and disclosed pension accounting data and firm value. Relative tests focus on whether currently recognized pension accounting information in the U.S. is more value relevant than pension accounting information fashioned as if a fair-value-based accounting standard were in place. I also conduct tests of incremental value relevance within the overall scheme of a relative value relevance study by way of model expansion and decomposition of composite pension variables to provide new evidence regarding pricing weights on pension accounting components and balance sheet and income statement information redundancy. The primary empirical analysis depends upon estimating pooled cross-sections of hand-collected data from annual Fortune 200 firm filings on Form 10-K between 1998 and 2002.; My findings indicate that fair-value-based pension accounting information is not more value relevant than pension information currently recognized in the financial statements. In fact, pension information recognized on the income statement under the current pension accounting standard is found to be more value relevant than that which would be recognized if a fair-value-based standard were in place in models with composite variables. However, once variables are disaggregated, fair-value data improve in value relevance, which suggests that the loss in value relevance is due mainly to the aggregation of transitory components (i.e. actuarial and investment gains and losses) with more persistent pension cost components. Findings of incremental value relevance of pension cost component variables suggest, similarly to previous research, that the market may overvalue pension components relative to regular earnings components. In contrast to earlier research, my results do not provide substantive evidence for pension balance sheet and income statement information redundancy. I provide new evidence regarding the incremental value relevance of the net amortization pension cost component and the off-balance sheet amount and their respective components as well. Results suggest that should the U.S. shift to a fair-value based accounting standard, recognizing more transitory elements of pension cost separately from net income as part of comprehensive income would avoid any loss in value relevance.