Edward M. Werner

Are Potential Effects of SFAS 158 Associated with Firms’ Decisions to Freeze Their Defined Benefit Pension Plans?

Purpose - The purpose of this paper is to examine whether the significant clustering of defined benefit (DB) pension plan freeze announcements during 2001-2006 is motivated at least in part by accounting concerns due to the Financial Accounting Standards Boards pending adoption of Statement of Financial Accounting Standards No. 158 (SFAS 158). Design/methodology/approach - Using logistic regression models, the paper compares 147 “freeze firms” with a matched sample of firms that did not announce a DB plan freeze. Empirical models control for other DB plan motives including as a response to stricter contribution requirements under the Pension Protection Act of 2006 and improving the firms competitive position. Findings - The potential SFAS 158 impact is significantly associated with firms decisions to freeze their DB plans. Firm profitability is also significantly associated with the freeze decision. However, there is no significant association between cash flow positions or pension plan contributions and the freeze decision. Research limitations/implications - It is possible that economic conditions adversely affecting the funded status of DB plans also motivate the freeze decision. While this study controls for the economic environment, economic factors could exacerbate the potential effect of SFAS 158. Originality/value - This paper considers potential effects of accounting policy by examining its influence on real management actions and has consequences for a variety of stakeholders including investors, creditors, and, importantly, pension beneficiaries and workers, as DB plans represent implicit contracts between firms and their employees.

The Value Relevance of Pension Accounting Information: Evidence from Fortune 200 Firms

Purpose - The purpose of this paper is to examine, in the context of movement towards a fair-value based pension accounting standard, the value relevance of both recognized and disclosed pension accounting information. Design/methodology/approach - Using hand-collected data from Findings - Findings indicate that pension information recognized under a fair-value-based accounting model is no more or less value relevant than pension information recognized under the SFAS 87 model. Also, the disclosed off-balance sheet pension amount is incrementally value relevant for determining share prices. However, it is not value relevant for the credit rating decision. Research limitations/implications - This study tests the relevance and reliability of accounting information jointly. Theoretically, however, relevance and reliability affect information usefulness and, thus, valuation decisions independently. Originality/value - This paper yields a number of significant implications for standard setters. The unique evidence that investors apply off-balance sheet pension amounts in the equity valuation context implies that required recognition under a fair-value standard may not provide a significant incremental benefit over DB plan disclosures. However, such a standard may yield potential improvements in the credit rating decision context and may be much more likely to impact credit rating decisions going forward. Considering the continued shift towards fair-value-based pension accounting standards internationally, recognizing transitory elements of fair-value pension cost separately from operating income is essential for mitigating any potential loss in value relevance.

“Secondary Evasion” and the Earned Income Tax Credit

This paper documents that the earned income of taxpayers claiming the earned income tax credit (EITC) tends to cluster within

Do Mandatory Risk Factor Disclosures Predict Future Cash Flows and Stock Returns? Evidence from Tax Risk Factor Disclosures

800 intervals surrounding the kink points of the EITC benefit distribution. This clustering is especially strong for head of household taxpayers around the kink point of the phase-in range and, to a lesser extent, for married filing joint taxpayers around the kink point of the phase-out range. The results from logit regression models estimated by filing status and kink point location indicate that secondary evasion with respect to the EITC is more associated with the characteristics of head of household taxpayers than those of married filing joint taxpayers.

The differential CEO dominance–compensation and corporate governance–compensation relations: Pre- and post-SOX

Prior research finds that mandatory risk factor disclosures are informative in that they increase investors’ assessments of the volatility of a firm’s cash flows. However, the literature is silent as to whether these disclosures provide information about the level of future cash flows and, ultimately, their implications for firm value. We address this question by examining the association between Form 10-K risk factor disclosures and future cash flows levels and stock returns. We use the setting of taxes because it is relatively easier to identify the specific income and cash flow statement line items to which these risks relate, and offer two main results. First, we find that tax risk factor disclosures are positively associated with future cash flows. This suggests that, on average, tax risk factor disclosures relate to tax positions that are rewarded with future tax savings. Second, we find that investors incorporate this relation into stock prices. In additional analysis, we find no evidence of a drift in stock prices, suggesting that investors incorporate the implications of tax risk factor disclosures in a timely manner. Overall, our results suggest that risk factor disclosures provide information about the level of a firm’s future cash flows, that the risks discussed in these disclosures are – on average – value-increasing, and that investors incorporate this information into current stock prices.