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Economic Consequences of the Transition from Disclosure to Recognition of Pension Funded Status Following SFAS

Woo-Jin Chang, 2009
Faculty Advisor: Partha Mohanram
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This paper examines the economic consequences of SFAS 158 which requires firms to recognize the full funded status of defined benefit pension plans in the balance sheet by investigating: (1) market reactions to relevant rulemaking events; (2) managers' changes in making estimates for pension accounting and managing plan assets; and (3) firms' lobbying behavior against the regulatory change in anticipation of the consequences. I find a more pronounced negative abnormal return around the SFAS 158 announcement date in underfunded firms when they have a higher probability of bankruptcy, when they belong to the financial industry where they have to meet capital requirements, or when they have more volatile plan assets. In addition, I find that more underfunded firms tended to increase their discount rate and proportion of equity in plan assets to a greater degree after the introduction of SFAS 158. Furthermore, I find that underfunded firms tended to lobby against the exposure draft during the rulemaking process. I also document the evidence that lobbying firms are more opposed to a provision in the exposure draft when they are more adversely affected.

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