An Examination of the Effect of Disclosures Concerning Unfunded Pension Benefits on Market Risk Measures
Stone, Mary Sheetz
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https://hdl.handle.net/2142/71362
Description
Title
An Examination of the Effect of Disclosures Concerning Unfunded Pension Benefits on Market Risk Measures
Author(s)
Stone, Mary Sheetz
Issue Date
1981
Department of Study
Accountancy
Discipline
Accountancy
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Business Administration, Accounting
Abstract
The passage of the Employee Retirement Income Security Act of 1974 (ERISA) prompted the publication of a number of empirically unsupported assertions concerning the impact of ERISA on investors' perceptions of the financial risk of firms sponsoring defined benefit pension plans. This study was undertaken to determine (1) if firms subject to the mandates of ERISA experienced shifts in systematic risk subsequent to the passage of ERISA; (2) if unfunded pension benefit measures appear to be reflected in market risk measures, and (3) if it is possible to quantify a financial risk premium specifically relating to the existence of unfunded pension benefits.
Application of the Chow test to a sample of firms with a significant amount of unfunded pension benefits (high intensity sample) and to a group of firms without significant amounts of unfunded pension benefits (control sample) did not support the assertion that the passage of ERISA was associated with a change in the systematic risk of firms sponsoring defined benefit pension plans.
The results of tests of association between market risk measures and accounting risk measures adjusted to reflect the existence of unfunded pension benefits indicated (1) for both the pre- and post-ERISA test periods pension-adjusted accounting measures were more highly correlated with nonsystematic risk measures than with systematic risk measures; (2) the degree of correlation between market and accounting risk measures was increased by the addition of pension data for the pre-ERISA period and decreased for the post-ERISA period; and (3) for the pre-ERISA period the addition of information concerning unfunded vested pension benefits increased the degree of correlation more than the addition of information concerning unfunded prior service costs.
Use of a model by Hamada (1969, 1972) to quantify the financial risk premium required by equity investors to induce them to invest in the common stock of firms sponsoring defined benefit pension plans resulted in a minimal unlevering of beta when adjustments were made for the presence of (1) unfunded vested benefits and (2) unfunded prior service costs. The slight pension-unlevering effect was attributed to the manner in which the unfunded pension benefit measures were constructed and the presence of substantial measurement error.
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