The relationship between pension disclosure and bond risk premium



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The information about employers' accounting for pensions is currently presented in the footnotes of financial statements rather than in the main body. This study examines vdiether or not the pension disclosure has information content. If it does have information content, pension liability and pension assets should be a factor determining a firm's financial risk. The financial risk, more specifically the default risk, is a factor determining a firm's cost of debt. The relationship between bond risk premium and pension disclosure is investigated by using a model of determinants of bond risk premium that originates from Fisher's study. The pension variable is defined as the net change of financial leverage resulting from the inclusion of the pension liability and pension assets in the determination of a firm's financial position. The vested pension benefit liability and the accumulated pension benefit liability are employed as measures of pension liability. In additional tests, the pension liability measures have been adjusted according to a discount rate determined by average market rate. The results of this study show that the pension disclosure does have unique information content. Some information is lost if pension assets and pension liability are presented as items on the balance sheet without a corresponding footnote disclosure. The results provide evidence that presenting information in aggregate form may not be as effective as presenting it in segregated form.



Pension trusts--Accounting