Market Sensitivity to Interest Rate Assumptions in Corporate Pension Plans

Chen, K. C.; D'Arcy, Stephen P.

doi:10.2307/252372

Cited by 10 publications

(12 citation statements)

References 7 publications

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“…However, more recent literature shows that disclosure of defined benefit plan considerations does affect firm value. Chen and D'Arcy (1986) find that share price reaction is different depending on the interest rate assumption used in the firm's pension plan and on the relative size of pension liabilities at the release of FASB 36. They conclude that pension plan considerations affect market performance, that increased disclosure provides investors with valuable additional information, and that investors must be assured of ready access to pension values and the assumptions inherent in pension plan costing for market forces to workefficiently (Chen and D'Arcy, 1986).…”

Section: Introductionmentioning

confidence: 94%

“…Chen and D'Arcy (1986) find that share price reaction is different depending on the interest rate assumption used in the firm's pension plan and on the relative size of pension liabilities at the release of FASB 36. They conclude that pension plan considerations affect market performance, that increased disclosure provides investors with valuable additional information, and that investors must be assured of ready access to pension values and the assumptions inherent in pension plan costing for market forces to workefficiently (Chen and D'Arcy, 1986). Holland and Sutton (1988) develop a theoretical model that extends the notion that debt is positively related to risk to include unfunded pension obligations (UPOs) for firms and then empirically test their extension.…”

Section: Introductionmentioning

confidence: 94%

“…More recent literature shows that pensions are not managed in a disinterested way and that disclosure of defined benefit plan considerations affect firm value. Specifically, Chen and D'Arcy (1986) and Alderson and VanDerhei (1992) show that the relevant information about defined benefit underfunding is publicly available and affects firm value. These research findings seem to suggest that further disclosure of underfunded pension liabilities by the PBGC, although several months later, should not surprise the financial markets.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Politics, Insurance Regulation, and Unfunded Pension Liabilities

Power

Dark

Singh

2000

Risk Manage Insurance Review

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Insurance regulators operate in an environment in which resources are scarce and issues are most often complex and not salient to affected persons. Consequently, regulatory agencies, such as the Pension Benefit Guaranty Corporation (PBGC), need to use resources efficiently by making issues salient and not complex if regulatory goals are to be attained. To further its goal of full funding of defined benefit pension plans, the PBGC annually published a list of the Top Fifty Companies With the Largest Underfunded Pension Liability (LIST). This article investigates the issue of the economic effects of pension plan disclosure by measuring the share price response of the companies included on the LIST; then policy implications are drawn. The event study findings show that, on average, publication of the LIST did not have a negative effect on firm value. However, cross-sectional analysis provides some support for the contention that publication of the LIST had an economic cost on LISTed firms. The authors' results show that the value of large firms on the PBGC's list is less negatively affected at arrival (ARRIVAL) than smaller LISTed firms. Conversely, when firms leave the list (DEPARTURE), the value of large growth-oriented firms is more negatively affected than the value of other firms that reduce their unfunded pension liability. From a policy perspective, as hypothesized by Meier (1991), the PBGC used its scarce resources effectively by publishing the LIST. The issue of unfunded pension liability became less complex and more salient to interested parties. Consequently, consumer groups and political elites provided their support to further the regulatory agency's stated goal, which was the full funding of defined benefit pension plans. Furthermore, increased awareness of the underfunding problem contributed to the passage of the Retirement Protection Act of 1994.

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Section: Introductionmentioning

confidence: 94%

Section: Introductionmentioning

confidence: 94%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Politics, Insurance Regulation, and Unfunded Pension Liabilities

Power

Dark

Singh

2000

Risk Manage Insurance Review

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“…The prior U.S.‐based empirical research has shed considerable light on the issue of whether pension liabilities are fully reflected in stock prices. Chen and D'Arcy (1986) examine whether the market is sensitive to different pension interest rate assumptions around the issue date of U.S. pension accounting proposals. This article analyzes the market performance of the securities of firms with varying pension plan interest rate assumptions around the release date of Financial Accounting Standards Board No.…”

Section: Institutional Background and Prior Researchmentioning

confidence: 99%

Stock Market Sensitivity to U.K. Firms' Pension Discounting Assumptions

Klumpes

McMeeking

2007

Risk Manage Insurance Review

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ABS TRACTNew UK pension accounting regulations significantly increase the exposure of the balance sheets of UK firms to volatilities in pension fund valuations. We examine whether the abnormal returns of firms that voluntarily used market based pension discount rates are significantly different from the abnormal returns of industrymatched pair samples of firms that retained traditional cost-based valuation assumptions during the period surrounding the release of the related exposure draft. We also examine the interest rate sensitivity of stock price returns over the four-year period before and after the announcement date. Consistent with our hypotheses, UK stock price returns incorporate the effect of unexpected interest changes on sources of pension earnings for firms that voluntarily switched to market based assumptions, but do not incorporate these effects for firms that do not switch. These results suggest that unexpected changes in interest rates have a differential effect on a firm's sources of pension, financial and core earnings.

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“…Examples of these issues include regulatory changes (Schwert 1981;Binder 1985;Chen and D'Arcy 1986;Moore and Schmit 1989;Horton and Macve 1998;Marlett and Pacini 1999), changes in business strategies (VanDerhei 1987;Impson and Karafiath 1992;Akhigbe, Borde, and Madura 1993;McNamara et al 1997;Akhigbe and Madura 2001), as well as the reporting of increases in liabilities or large losses (Sprecher and Pertl 1983;Davidson, Chandy, and Cross 1987;Baginski, Corbett, and Ortega 1991;Shelor, Anderson, and Cross 1992;Lamb 1995;Cagle 1996). In the banking area, studies such as McNichols and Wilson (1988), Beaver et al (1989), Elliot, Hanna, and Shaw (1991), Griffin and Wallach (1991), and Wahlen (1994) have analyzed the information content related to the announcements of increased reserves for loan loss reserve changes.…”

Section: Prior Literaturementioning

confidence: 99%

The Impact of Asbestos and Environmental Reserves Increases on Shareholder Wealth

Colquitt

Hoyt

McCullough

2006

North American Actuarial Journal

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Between 1992 and 2001 significant reserves increase announcements were made by several major property/liability insurers. These reserves increases were for the purpose of recognizing expected asbestos and environmental (A&E) liability. Although most analysts agree that U.S. insurers are underreserved for asbestos and environmental liability, how the market reacts to an insurer's announcement of an increase in these reserves has not been analyzed. An insurer that is significantly underreserved is likely to be viewed by the market as lacking financial stability for the long term. However, when a company increases its reserves, there is a charge to income and a reduction in capital. If surplus is diminished sufficiently as a result of the increased reserving, regulatory attention and eroding shareholder and market confidence could result as well. By calculating the sample insurers' cumulative abnormal returns surrounding the largest asbestos and environmental reserves increase announcements made between 1992 and 2001, the study estimates and documents the market's reaction to these reserves increase announcements. We further explore the potential impact of additional asbestos and environmental liability exposure reporting requirements. Starting with 1995 statutory annual accounting statements, Footnote 24 required additional reporting by insurers of their asbestos and environmental liability exposure (1995 statements were publicly available by the end of the first quarter of 1996). When looking at reserves increase announcements prior to this additional reporting requirement, we find that most insurers announcing large increases in asbestos and environmental reserves prior to 1996 experience a significant reduction in stock price in the days surrounding their announcement. However, consistent with the notion that the additional accounting disclosure requirements after 1995 (Footnote 24) provide valuable information on insurers' exposure, we find that the announcement of A&E reserves increases after 1995 had no statistically significant effect on the market value of announcing insurers.

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Market Sensitivity to Interest Rate Assumptions in Corporate Pension Plans

Cited by 10 publications

References 7 publications

Politics, Insurance Regulation, and Unfunded Pension Liabilities

Politics, Insurance Regulation, and Unfunded Pension Liabilities

Stock Market Sensitivity to U.K. Firms' Pension Discounting Assumptions

The Impact of Asbestos and Environmental Reserves Increases on Shareholder Wealth

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