An Empirical Examination of Mark-to-Market Accounting For Corporate Pension Plans

• In Event: Financial Accounting and Reporting 1

Abstract

This paper investigates the factors associated with firms’ decision to adopt the mark-to-market treatment for pension accounting. The prevailing accounting approach regarding gains/losses on pension assets and liabilities is the corridor approach under which gains/losses are deferred through accumulated other comprehensive income and subsequently recycled into net income. However, since 2010 some firms have voluntarily switched to the mark-to-market approach which results in accelerated recognition of gains/losses in earnings. We find that adopting firms are larger and have greater pension losses included in accumulated other comprehensive income compared to non-adopting firms. We further document a positive cumulative abnormal return around adoption announcement dates. Additionally, we find that investors reacted positively to the amount of losses transferred from accumulated other comprehensive income to retained earnings as a result of the accounting change. Taken together, our findings suggest investors expect the benefits (reducing drag on future earnings and greater transparency) of mark-to-market pension accounting adoption to outweigh the costs (greater earnings volatility and reduced comparability). Our study provides timely and relevant evidence on the determinants and implications of mark-to-market pension accounting, which is being adopted by a growing number of companies.

Authors

• Tim Eaton, Miami University

• Qing Burke, Miami University

• Po-Chang Chen, Miami University