[This study uses SFAS No. 106 disclosures to investigate the abilities of postretirement benefit (PRB) liability components and cost components to explain cross-sectional variation in market-to-book ratios. SFAS No. 106 requires disclosures of the sensitivity of the PRB liability and cost to the health care cost trend rate. This study also examines the value-relevance of this new disclosure and its effect on reducing measurement error variance in the PRB information. Results indicate that PRB disclosures are value-relevant conditioned on earnings and pension information. When both cost and liability components are considered, information on cost components is useful, whereas information on liability components has only marginal explanatory power. When the measurement error in the PRB liability is reduced using the standard's sensitivity disclosures, the explanatory power of the liability components increases significantly.]

Investigates the abilities of postretirement benefit (PRB) liability components and cost components to explain cross-sectional variation in market-to-book ratios. Use of Statement of Financial Accounting Standards (SFAS) No. 106 disclosures; Statistical analysis; Implications.

[The majority of empirical regulatory accounting studies on financial reporting have focused on the ex post evaluation of accounting choices (see Lev [1979] and Barth [1991] among others) after an accounting method is adopted. There has not been much research involving the evaluation of accounting methods ex ante because, it is argued, newly mandated accounting information is usually available only some time after the Financial Accounting Standards Board (FASB) has required its release. In December 1990, after lengthy and controversial deliberations, the FASB issued SFAS No. 106, Employers' Accounting for Postretirement Benefits other than Pensions (PRB) replacing the current "pay as you go" practice with a combination of present-value and accrual method. Few of the information items mandated by SFAS No. 106 has yet been disclosed earlier. Consequently, this research uses the data that were available during the time of the FASB's deliberations as an example of ex ante empirical research concerning the standard-setting process. This study uses the PRB cash payments to retirees as disclosed by firms in their footnotes to the financial statements under SFAS No. 81 (FASB 1984) to investigate whether investors underestimated the full effect of the PRB liability on firms' values. Such underestimation would occur if investors are not aware of the high rate of increase in health care costs or when future benefits' payments to current employees are partially ignored. Additionally, this study investigates whether an estimate of the present value of the PRB liability is value-relevant to investors. Finally, an analysis is made of the range and sensitivity of economic parameters (discount rate and health care cost trend rate) used by investors to estimate the PRB obligation. The results indicate that, during the period 1984-1986, investors, on average, valued each dollar of PRB cash payment in any year as a dollar; i.e., they underestimated the full consequences of firms' promise to continue making such payments in the future. During the period 1987-1990, in contrast, investors translated each dollar of PRB cash payment to an average of $13.75 PRB obligation. Further, estimating the present value of the PRB obligation with publicly available data shows that the present-value measure is value-relevant to investors in addition to the cash payments disclosed by firms.]

The majority of empirical regulatory accounting studies on financial reporting have focused on the ex post evaluation of accounting choices (see Lev [1979] and Barth [1991] among others) after an accounting method is adopted. There has not been much research involving the evaluation of accounting methods ex ante because, it is argued, newly mandated accounting information is usually available only some time after the Financial Accounting Standards Board (FASB) has required its release. In December 1990, after lengthy and controversial deliberations, the FASB issued SFAS No. 106, Employers' Accounting for Postretirement Benefits other than Pensions (PRB) replacing the current "pay as you go" practice with a combination of present-value and accrual method. Few of the information items mandated by SFAS No. 106 has yet been disclosed earlier. Consequently, this research uses the data that were available during the time of the FASB's deliberations as an example of ex ante empirical research concerning the standard-setting process. This study uses the PRB cash payments to retirees as disclosed by firms in their footnotes to the financial statements under SFAS No. 81 (FASB 1984) to investigate whether investors underestimated the full effect of the PRB liability on firms' values. Such underestimation would occur if investors are not aware of the high rate of increase in health care costs or when future benefits' payments to current employees are partially ignored. Additionally, this study investigates whether an estimate of the present value of the PRB liability is value-relevant to investors. Finally, an analysis is made of the range and sensitivity of economic parameters (discount rate and health care cost trend rate) used by investors to estimate the PRB obligation. The results indicate that, during the period 1984-1986, investors, on average, valued each dollar of PRB cash payment in any year as a dollar; i.e., they underestimated the full consequences of firms' promise to continue making such payments in the future. During the period 1987-1990, in contrast, investors translated each dollar of PRB cash payment to an average of $13.75 PRB obligation. Further, estimating the present value of the PRB obligation with publicly available data shows that the present-value measure is value-relevant to investors in addition to the cash payments disclosed by firms.

Discretionary disclosures, SFAS No. 106, Accounting standard adoption, Private information

[We examine the correlation between the expected rate of return on pension assets (ERR), as reported in the financial statements, and the composition of the pension portfolio, measured as the percent invested in equities (% Equity). Our evidence indicates that ERR and%Equity are related, but the relation is rather weak. We also examine whether ERR and%Equity are correlated with future returns on pension assets. Only%Equity is correlated with future pension returns. Our results suggest that the FASB should consider the enforcement rather than elimination of current disclosure requirements regarding pension asset composition.]

We examine the correlation between the expected rate of return on pension assets (ERR), as reported in the financial statements, and the com- position of the pension portfolio, measured as the percent invested in equities (% Equity). Our evidence indicates that ERR and %Equity are related, but the relation is rather weak. We also examine whether ERR and %Equity are correlated with future returns on pension assets. Only %Equity is correlated with future pension returns. Our results suggest that the FASB should consider the enforcement rather than elimination of current disclosure requirements regarding pension asset composition.

[This study examines managers' adoption-timing motives related to SFAS No. 106. Results suggest that firms attempt to correct the market's perception of the magnitude of the postretirement benefit (PRB) obligation by choosing early adoption. We find that 1991 adoptors of SFAS No. 106 had lower unexpected PRB liabilities than 1992 adoptors, who in turn had lower unexpected liabilities than 1993 adopters. Earnings management is also considered as a motive for adoption-timing. Many firms adopt the standard in the year (and quarter) with the lowest pre-SFAS No. 106 earnings. Finally, we consider PRB renegotiation efforts as a motive for delaying adoption and find that 1992 and 1993 adopters are indeed more likely than 1991 adopters to reduce PRB obligations by negotiating a plan amendment.]