Corporate bond spreads and understated pension liabilities

PurposeThe question is whether debt market investors see through managers' attempts to hide their pension obligations. The authors establish a robust relation between understated pension liabilities and corporate bond yield spreads after controlling for factors that have been previously identified as having a significant impact on firms' cost of borrowing. The results support the idea that bond market investors are not being misled by the use of high pension liability discount rates by some companies to lower their reported pension obligations. For a small fraction of debt issuers, the reported pension liabilities are larger than the pension liabilities valued at the stipulated interest rate benchmarks. For these issuers with overstated pension liabilities, bond investors adjust their borrowing costs downward.Design/methodology/approachThe authors investigate the relation between corporate bond yield spreads and understated pension liabilities relative to long-term Treasury and high-grade corporate bond yields. They aim to answer two questions. First, what are the sizes of over or understated pension liabilities relative to guideline benchmarks? Second, do debt market investors see through the potential management manipulation of pension discount rates? The authors find that firms with large understated pension liabilities face higher marginal borrowing costs after taking into account issue-specific features, firm characteristics, macroeconomic conditions and other pension information such as funded status and mandatory contributions.FindingsThe average understated projected benefit obligations (PBOs) are understated by $394.3 and $335.6, equivalent to 3.5 and 3.0% of the beginning of the fiscal year market value, respectively. The average understated accumulated benefit obligations (ABOs) are understated by $359.3 and $305.3 million, equivalent to 3.1 and 2.6%, of the beginning of the fiscal year market value, respectively. Relative to AA-grade corporate bond yields, the average difference between firm pension discount rates and benchmark yields becomes much smaller; the percentage of firm pension discount rates higher than benchmark yields is also much smaller. As a result, understated pension liabilities become negligible. The authors establish a robust relation between corporate bond yield spreads and measures of understated pension liabilities after controlling for issue-specific features, firm characteristics, other pension information (funded status and mandatory contributions), macroeconomic conditions, calendar effects and industry effects.Originality/valueS&P Rating Services recognizes the issue that there is considerably more variability in discount rate assumptions among companies than in workforce demographics or the interest rate environment in which firms operate (Standard and Poor's, 2006). S&P also indicates that it would be desirable to normalize different discount rate assumptions but acknowledges that it is difficult to do so. In practice, S&P Rating Services conducts periodic surveys to see whether firms' assumed discount rates conform to the normal standard. The paper makes an initial attempt to quantify the size of understated pension liabilities and their impact on corporate bond yield spreads. This approach can be extended to study firms' costs of equity capital, the pricing of seasoned equity offerings and the pricing of merger and acquisition transaction deals, among other questions.

UNESCO, the United Kingdom, and Cultural Diversity after the Millennium

This final diachronic chapter steps back from the question of literature’s publicly funded status to consider how cultural diversity became an important site of negotiation in the United Kingdom’s dealings with UNESCO. It suggests that cultural diversity was not only a competency developed through post-war state funding but an expansive discourse appropriated by competing geopolitical alliances within UNESCO. The 2005 UNESCO Convention on the Protection and Promotion of the Diversity of Cultural Expressions staged the larger tensions between the national and supra-national debates of cultural diversity. For all its flaws, and the United Kingdom’s ongoing ambivalence about UNESCO, the Convention promised to institute a more equitable public culture in ways that the controversy over the 2017 Jhalak Prize for Black Asian and Minority Ethnic writers suggests were sorely needed.

Visual Atlas Analysis of Acceleration Sensor Research Literature Based on CiteSpace Bibliometrics

This paper uses CiteSpace information visualization software to visualize the acceleration sensor research literature based on more than 1100 literatures in the field of acceleration sensor research and application from 2010 to 2018. From the point of view of bibliometrics, the paper analyzes the visualization map of hot spot distribution, such as the country, discipline, research institution and funded status, the co-citation literature and the research frontier. Moreover, this paper compares and analyzes literature information on research and application fields of acceleration sensors at home and abroad in recent years. Information is used to evaluate the research progress and development trend of acceleration sensors, in order to provide literature reference for the relevant personnel engaged in the research of acceleration sensors.

Does pension plan reporting readability affect earnings volatility?

Purpose The purpose of this study is to explore whether pension plan reporting readability affects earnings volatility. Moreover, as SFAS 158 requires firms to fully recognize their funded status on the balance sheet, the firms’ pension liabilities (inside debts) and financing ability have the corresponding change. This study further investigates whether pension plan reporting readability affects earnings volatility from the SFAS 158 and funded status perspectives. Design/methodology/approach This study follows Li (2008), Lehavy et al. (2011) and Rennekamp (2012) to use the FOG and SMOG variables as the readability proxies and investigates whether pension plan reporting readability affects earnings volatility from the perspectives of inside debts and SFAS 158 by using a sample of 3,077 American firms from the year 2006 to 2009. Findings Empirical results of this study show that firms with low readability of pension plan reporting have high earnings volatility, revealing that less readable pension plan reporting increases the assessed variance of a firm’s inside debts, financing flexibility, investment ability and therefore profitability. In addition, the implement of SFAS 158 enhances the effect of pension plan reporting readability on earnings volatility. Moreover, the authors also find that the funded status plays a moderating role for the effect of pension plan reporting readability on earnings volatility. Finally, the results are robust to endogeneity issue. Research limitations/implications Earnings stability measures how consistently earnings have been generated over time, and its importance has been acknowledged by most firms. For example, prior literature has documented that manipulating financial reporting to smooth earnings is becoming a business common practice (Burgstahler et al., 2006; Liu and Espahbodi, 2014). The empirical results suggest that pension plan reporting readability is a significant determinant of earnings volatility. Practical implications As a practical implication, this study points out that manipulations of the pension reporting readability are not costless. It incurs the costs of earnings instability. Social implications This study indicates that the issuance of SFAS 158 makes firms more likely to engage in pension plan readability manipulation. As a result, it has policy implication that the regulator should consider how the policy change alters the firm financial reporting behavior. Originality/value The empirical results suggest that firms may be more likely to engage in obfuscating pension plan disclosure after FASB’s issuance of SFAS 158. This would further increase outside investors’ assessed variance for inside debts and earnings volatilities. When policymakers require firms to recognize their funded status in statement of financial position, they should consider the costs or benefits that the firm manager face and, therefore, how this policy change alter the firm financial reporting behavior.

An Analysis of Debt and Equity Market Reaction to Pension Risk Transfer Announcements: What Investors Need to Know

The pension annuity buyout market continues to experience very strong growth, with record deal volumes being reported. Cantor, Hood, and Power (2017) document a large variation in stock market reaction to annuity buyout announcements. The fundamental question remains however: Does the equity market care about these transactions? In Cantor, Hood, and Power (2018), we hope to further understand the market’s view of pension annuity buyout transactions. We argue that the funded status of the pension fund and the motivation for the buyout could drive the market’s reaction. By expanding our sample and gathering data on funded status, we can test the market’s reaction based on the funded status of the plan prior to the announcement. In addition, we examine the credit market’s reaction to the buyouts. We argue that the equity and debt markets may have a different reaction to the news, conditional on the funded status and credit quality of the company. Our research has important implications for plan sponsors considering whether a pension annuity buyout is an effective transaction. Moreover, our research is relevant for investors who are trying to interpret the impact of these transactions on a company’s value.

Why Pairing LDI with De-Risking Glide Paths Produces Inferior Pension Fund Outcomes

Combining traditional Liability Driven Investment (LDI) with funded status responsive de-risking strategies involves inconsistent treatment of risks in these two elements of what has become a popular pension strategy. This inconsistency causes irreconcilable conflicts in their execution and imperils the positive pension fund outcome. This article provides a critique of the combined LDI/De-risking Glide Path strategy as currently implemented by many pension plan managers and also provides an example of an alternative solution that improves pension plan outcomes. Our prescription for the pension de-risking glide path approach differs from conventional wisdom, resulting in faster de-risking, without undesirable market betas that are unrelated to the liability. It also avoids illiquid assets that pension funds often gravitate toward in their quest for returns, takes fewer credit risks, and seeks more alpha risks.

The Value and Credit Relevance of Multiemployer Pension Plan Obligations

ABSTRACT We investigate whether multiemployer defined-benefit pension plan (MEPP) underfunding is priced by shareholders and creditors. Prior to the FASB's new MEPP standard (effective December 2011), when the disclosures on such plans were sparse, we find evidence (some evidence) that our estimate of a firm's share of MEPP underfunding is credit (value) relevant. We also find some evidence that a proxy for the funded status of a firm's MEPPs is incrementally value relevant over and above the firm's cash contributions, but no evidence that it is credit relevant. Furthermore, an estimate of MEPP underfunding that incorporates the additional disclosures required under the new MEPP standard is value and credit relevant, both individually and incrementally, over and above our old estimate. Overall, our findings suggest that shareholders and creditors view MEPP underfunding as a debt-like obligation and that the additional MEPP disclosures under the new standard are useful to market participants.

An Analysis of Critical Accounting Estimate Disclosures of Pension Assumptions

SYNOPSIS Accounting for defined-benefit pension plans is complex, and reported financial statement amounts are significantly impacted by a myriad of assumptions. In its interpretative release FR-72 (SEC 2003), the SEC called for more informative and transparent Management Discussion and Analysis (MD&A) disclosure of critical accounting estimates (CAE), including those regarding pension plans. This paper uses a random sample of 147 firms with relatively large defined-benefit pension plans to analyze firms' MD&A pension-related critical accounting estimate disclosures. We find that 60 (61) percent of our sample firms quantify the effect on pension measurements—primarily pension expense—of a given change in discount rates (expected asset returns). The median effect on earnings per share of these CAE-disclosing firms is between two and three cents. Firms rarely disclose the effects of potential changes in future salary assumptions or other estimates on pension measurements. While FR-72 encourages MD&A disclosure of information to assess the past accuracy of or predict future changes in critical accounting estimates, few firms provide such information with respect to their pension plans, suggesting avenues for improvement in disclosures. Finally, we use logistic regression to analyze the determinants of firms' decisions to disclose the sensitivity of pension expense to pension discount rate or expected asset return assumptions. Results indicate that the likelihood of providing a discount rate or expected asset return CAE is positively related to firm size, having a Big 4 auditor, and the variability of pension plan funded status, and is lower for firms operating in regulated industries and for firms with better-funded pension plans.

Pension plan risk-taking: does it matter if the sponsor is publicly-traded?

We use a large sample of defined benefit (DB) pension plans to document economically significant differences in the risk-taking of plans sponsored by privately-held versus publicly-traded firms. The magnitude and the main determinants of pension plan risk-taking are different for public and private firms. The effect of pension liabilities’ funded status on risk-taking is two and a half times higher for plans with publicly-traded sponsors than for plans with private sponsors. In contrast, changing sponsor contributions has more than four times higher effect on risk-taking for plans with private sponsors. The results suggest that the alignment of incentives for the stakeholders in a pension contract is different for plans sponsored by private versus publicly-traded firms.