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Dissertations

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

Woo-Jin Chang, 2009
Faculty Advisor: Partha Mohanram

Abstract

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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