Did Pension Plan Accounting Contribute to a Stock Market Bubble?Julia Lynn Coronado and
Steven Sharpe ()
Brookings Papers on Economic Activity, 2003, vol. 34, issue 2003-1, pages 323-371 Abstract: During the 1990s the assets of corporate defined-benefit pension plans ballooned with the booming stock market. Under current accounting guidelines, the result was a substantial but stealthy boost to sponsoring firms' profits. This study assesses the extent to which investors were fooled by pension accounting. It finds that stock prices reflected not the fair market value of sponsoring firms' net pension assets, as reported in the footnotes to their financial statements, but rather some capitalization rate on pension cost accruals in the income statement. Additional tests indicate that the market values a firm's pension earnings no differently from its core earnings, suggesting that pension earnings are often overvalued. This failure to differentiate induces large valuation errors for many firms, although this does not seem to translate into aggregate overvaluation, at least not before 2001, when falling stock prices and interest rates slashed pension net asset values but not pension earnings. Keywords: macroeconomics; Pension Plan Accounting; Stock Market Bubble (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: http://EconPapers.repec.org/RePEc:bin:bpeajo:v:34:y:2003:i:2003-1:p:323-371 Access Statistics for this article More articles in Brookings Papers on Economic Activity from Economic Studies Program, The Brookings Institution |
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