On the value relevance of SFAS No. 158

After considerable discussion and some controversy, Statement of Financial Accounting Standards No. 158 entitled, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” was implemented in 2006. An important goal of these standards was to enhance financial reporting transparency for defined benefit pension plans (FASB, 2006). This study evaluates how well SFAS No. 158 achieved its objective. In particular, we compare the respective pre and post-SFAS 158 incremental value relevance of the balance sheet and income statement for firms with defined benefit pension plans (DBPP). Results suggest that the value relevance of book value (net income) increased (decreased) for DBPP firms after the implementation of SFAS No. 158.     

The Valuation Effect of Accounting Standard 158 on Firms with High and Low Financial Risk

SFAS 158 mandated balance sheet disclosure of the funded status of firms’ Defined Benefit Pension Plan using the Projected Benefit Obligation (PBO) to estimate the pension liability. SFAS 158 caused a market phenomenon because the use of the PBO engendered dramatically higher estimates of pension liability and hence the perception of risk. Our work focuses on two aspects of this change in pension accounting: first, how will industry firms change their accounting strategy in light of the new rules, and second, how will firms’ stock prices be affected by the new allegedly better estimate of pension liability? Our research suggests that firms’ accounting strategies changed in that they use higher discount rates to estimate pension liability which offset the dramatic impact of using the PBO. In addition, we find that high financial risk firms’ tendencies to use higher discount rates increase with the firms’ leverage and decrease with liquidity. To test the market reaction we utilize standard event study methodology to investigate the effects of SFAS 158 on stock returns. Our findings suggest that firms with high (low) financial risk earn negative (positive) abnormal returns on and around relevant event dates preceding the implementation of SFAS 158.     

Highly Valued Equity and Discretionary Accruals

Abstract:  Overvalued equity provides a strong incentive for managers to report earnings that do not disappoint the market (  Jensen, 2005 ). We find that this can be extended to highly valued equity more generally. In the year following the classification as highly valued and compared to firms with less extreme valuations, highly valued firms have significantly higher discretionary accruals and exhibit a more pronounced positive association between discretionary accruals and proxies for the likelihood of failing to meet earnings targets. These findings are consistent with the use of discretionary accruals to manage earnings in support of extreme valuation. Because highly valued equity will likely result in CEOs with valuable stock and stock option portfolios, we test whether and show that the overvalued equity incentive is incremental to a CEO's equity portfolio incentive. One implication is that directors and audit committees should be especially on guard for possible earnings management when a firm has extremely high valuation multiples and when the CEO has a lot of equity at risk.     

New evidence on the incremental information content of earnings reported using the LIFO inventory method

This study extends prior research by comparing the relative information quality of LIFO earnings and non-LIFO earnings using updated data and methodology. Results suggest LIFO earnings are incrementally informative independent of tax reporting implications. In addition to shedding light on why the results of prior studies present conflicting evidence about the relative information content of LIFO, these findings are important in light of international accounting standards convergence efforts, under which LIFO is currently prohibited.     

Empirical analysis of the impact of cigarette excise taxes on cigarette consumption: estimates from recent state-level data

The adverse health effects from cigarette smoking account for an estimated 443,000 deaths annually in the U.S. Given this circumstance, this study has two objectives. First, it uses a state-level panel data set for a recent time frame to investigate the impact of federal plus state cigarette excise taxes (along with a variety of other factors) on the aggregate consumption of cigarettes. The study adopts a state-level panel data series spanning the period 2002 through 2007, which is the most recent panel for which data for all of the variables are available. Consistent with a number of previous studies, the PLS estimates in this study find that the higher the cigarette excise tax, the lower the aggregate volume of cigarettes consumed. Of course, this outcome does not address the practical problem of the substitution of high nicotine cigarettes for low nicotine cigarettes in the presence of a significant cigarette tax hike. This circumstance leads to the second objective of this study, namely, to propose a general template for a different kind of cigarette excise tax, one that is tied directly to each cigarette brand’s nicotine and tar content.