Market Valuation of Pension Plan Information: The Case of Canada

Ines Ben Salah, Houcem Smaoui, Daniel Coulombe and Suzanne Paquette

This paper examines the association between disclosed financial accounting data about defined benefit pension plans (DBPP, hereafter) and firm value while controlling for the effect of managerial discretion in the choice of actuarial assumptions used to calculate pension related numbers. Our study proposes a two-stage generalized least squares methodology to take into account the endogeneity of the choice of actuarial assumptions by management. Our findings suggest that investors value pension plan surplus as asset of the firm and pension plan deficits as liabilities of the firm. They further indicate that managers use their managerial discretion in the choice of actuarial assumptions and investors take into account this discretion, and adjust their valuation accordingly.