EconPapers    
Economics at your fingertips  
 

Did pension plan accounting contribute to a stock market bubble?

Julia Lynn Coronado and Steven Sharpe

No 2003-38, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: During the 1990s, the asset portfolios of defined-benefit (DB) pension plans ballooned with the booming stock market. Due to current accounting guidelines, the robust growth in pension assets resulted in a stealthy but substantial boost to the profits of sponsoring corporations. This study assesses the extent to which equity investors were fooled by pension accounting. First, we test whether stock prices reflected the fair market value of sponsoring firms' net pension assets reported in footnotes to the 10-K or, instead, some capitalization rate on the pension cost accruals embedded in the income statement. The results strongly favor the latter view. Additional tests indicate that the market does not value a firm's \"pension earnings\" differently from its \"core earnings\", suggesting that pension earnings are often overvalued. Simulations show that a failure to differentiate between core and pension earnings induces large valuation errors for many firms, although this pension effect did not materially contribute to aggregate in overvaluation 2000. However, overvaluation from pension earnings reached 5 percent in the aggregate in 2001, when the steep stock price decline and the drop in interest rates had slashed pension net asset values but not pension earnings.

Keywords: Stock market; Pensions (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

Downloads: (external link)
http://www.federalreserve.gov/pubs/feds/2003/200338/200338abs.html (text/html)
http://www.federalreserve.gov/pubs/feds/2003/200338/200338pap.pdf (application/pdf)

Related works:
Journal Article: Did Pension Plan Accounting Contribute to a Stock Market Bubble? (2003) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2003-38

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().

 
Page updated 2025-03-31
Handle: RePEc:fip:fedgfe:2003-38