Unfunded pension liabilities and stock returns

This paper investigates whether the market rationally anticipates the value implications of unrecognized pension obligations, using a large sample of Japanese firms where pension obligations are substantially underfunded. If a firm's unrecognized pension obligation is not incorporated into its...

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Bibliographic Details
Published in:Pacific-Basin finance journal 2010, Vol.18 (1), p.47-63
Main Authors: Nakajima, Kan, Sasaki, Takafumi
Format: Article
Language:English
Subjects:
Market efficiency
Market efficiency Unfunded pension obligations
Unfunded pension obligations
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Summary:This paper investigates whether the market rationally anticipates the value implications of unrecognized pension obligations, using a large sample of Japanese firms where pension obligations are substantially underfunded. If a firm's unrecognized pension obligation is not incorporated into its share price, its stock returns will be lower than those of other firms, because its deficit will affect the firm's income statement in the coming years. We find that firms with large unrecognized obligations earn lower risk-adjusted returns. This evidence suggests that the market does not efficiently incorporate information in the pension items.
ISSN:0927-538X
1879-0585
DOI:10.1016/j.pacfin.2009.06.001