Good Disclosure Doesn’t Cure Bad Accounting – or Does it? Evaluating the Case for SFAS 158

An Event Study Analysis of Statement of Financial Accounting Standards No. 158

“…158 find mixed results. Beaudoin, Chandar, & Werner (2011) do not find any incremental valuation effects of the newly recognized pension liabilities and conclude that analysts have always adjusted their analyses to account for the pension plans. In contrast, Knowles (2011) finds that firms with underfunded defined benefit plans experience an increase in valuation after they recognized the net funded status.…”

“…She also acknowledges that recognition could have real contracting effects that did not exist with disclosure. Knowles (2011) suggests that her use of a longer horizon than Beaudoin et al (2011) may explain the difference in their results.…”

Recognition versus Disclosure and Audit Fees and Costs: Evidence from Pension Accounting in Japan

“…Capital market participants employ not only recognized amounts in financial statements but also disclosed financial information in the notes in their decision making. Previous studies find that capital market participants consider disclosed pension information and assess firms' stock prices (stock returns) and risk (e.g., Barth, 1991;Beaudoin et al, 2011;Dhaliwal, 1986;Gopalakrishnan, 1994;Kraft, 2015;Landsman, 1986). For instance, Dhaliwal (1986) suggests that capital market participants amend firms' leverage using offbalance sheet pension information in the notes when assessing firms' equity risk.…”

“…However, recent studies also report that capital market participants face difficulties in understanding the pension information disclosed in the notes (e.g., Basu and Naughton, 2018;Beaudoin et al, 2011;Landsman and Ohlson, 1990;Picconi, 2006;Sengupta and Wang, 2011;Yu, 2013). For instance, Basu and Naughton (2018) find that credit rating agencies adjust disclosed pension information incorrectly in the pre-SFAS 158 period and thus upgrade corporate credit ratings after the adoption of SFAS 158.…”

“…Much of the prior research on recognition versus disclosure in capital markets analyzes how recognized versus disclosed items are related to firms' stock prices (stock returns) and risk (e.g., Bratten et al, 2013;Dhaliwal et al, 2011;Kusano, 2019;Michels, 2017;Müller et al, 2015). Previous studies use DB pension plans to examine whether capital market participants process disclosed and recognized pension information differently (e.g., Beaudoin et al, 2011;Yu, 2013). For instance, Yu (2013) reports that recognizing previously off-balance sheet pension liabilities increases value-relevance for firms with less sophisticated financial statement users, and that this increase becomes less evident for firms with more sophisticated financial statement users.…”