Valuation Implications of Defined Benefit Pension Plans

This paper re-examines the valuation implications of U.S. defined benefit (DB) pension plans. The study is motivated by: 1) the mixed results of prior research; 2) the fact that the FASB and IASB have both put comprehensive projects on post-employment benefits on their agendas with the stated objective of achieving a converged standard; and 3) the current level of concern over the financial status of DB plans. The FASB completed the first phase of its project with the issuance of Statement Financial Accounting Standard (SFAS) No. 158. The research design in this study is congruent with the changes required by the new standard and provides evidence of the potential valuation implications of SFAS #158, an unusual circumstance for a new, not yet implemented standard. Our results indicate that investors, on average, do not value either the pension assets or the pension obligations as similar to the other assets and liabilities of the sponsor firm.