Abstract - Quest for Global Competitiveness - Universidad de Puerto ...

The studies mentioned above find conflicting results in relation to EMH. Theinformation included in the financial statements, the notes to the financial statementsand other complementary information should be relevant and reliable. As seen fromthese studies, concerns about the incorporation of accounting information have arisenthrough the years. Some elements of accounting information have evolved in terms ofimportance to the company and investors, and, as a result, the need for betterdisclosure of information. A clear example for the increasing importance of accountinginformation disclosures is pension plan accounting.A review of the literature suggests that the market overvalues firms with severelyunderfunded pension plans (Franzoni and Marín 2006, Godwin and Key 1998).Furthermore, investors do not anticipate the impact of the pension liability on futureearnings, and they are surprised when the negative implications of underfundingultimately materialize (Franzoni and Marín 2006). Previous studies consider managers’choice to overfund or underfund their plans (Phillips 2003), the association of pensionplan status and capital expenditures (Rauh 2006) and the association betweensystematic equity risk and the risk of pension plans (Jin, Merton, Bodie 2006).One of the most recent studies is Franzoni and Marín (2006). They examinewhether the market value of the firms sponsoring DB plans reflects their pensionliabilities and find significant evidence of overvaluation for firms with severelyunderfunded pension plans. They show that the portfolio with the most underfundedfirms earns low raw returns relative to portfolios of firms with healthier pension plans.They interpret this evidence as being due to investors not paying enough attention tothe implications of the current underfunding for future earnings and cash flows andbeing surprised by the negative impact of the underfunding on earnings and cash flows.Carroll and Niehaus (1998) empirically examine the relationship between corporate debtratings and pension funding. They find evidence that indicates that unfunded pensionobligations reduce debt ratings more than an equivalent amount of excess pensionassets increase in debt ratings. According to the authors, this relationship is consistentwith the view that an unfunded pension obligation is a corporate liability that comparesto other debt claims. In accordance with this, Stefanescu (2005) reexamines firms’structure of liabilities and integrate pension plans as fully owned subsidiaries to