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

contributions, less benefits paid. The PBO, according to SFAS No. 87, represents theactuarial present value of vested and non-vested benefits earned by an employee forservice rendered to date plus projected benefits attributable to salary increases. Themeasurement of the accumulated benefit obligation is based on current and pastcompensation levels.The variables of interest correspond to different accounting items. Thus, thisaccounting data is constructed differently for different periods in the sample. There aretwo breaks in the way Compustat informs the data related to pension plans that emergefrom changes in accounting standards. The first break is caused by the accountingstandard SFAS No. 87. It affects the way pension data is presented starting fiscal yearsbeginning after December 15, 1986. The second break, effective for fiscal yearsbeginning after December 15, 1997, is caused by SFAS No. 132.Another element related to pension plans is the pension and retirement expenses(PRE). The PRE represents the amount recognized in an employer’s financialstatements as the cost of a pension plan for a period. It is composed of the servicecost, interest cost, actual return on plan assets, gain or loss, amortization ofunrecognized prior service cost, and amortization of the unrecognized net obligation orassets existing at the date of initial application of SFAS No. 87. Once the data isorganized, the variables of interest are constructed.In order to measure PRE, FVPA and PBO, the procedure used by Franzoni andMarín (2006) is used. The same dollar amount of these elements has different impactsfor these variables depending on the size of the firm. To solve this problem, thevariables are appropriately normalized by dividing them by market capitalization at theend of fiscal year when the elements are measured.For accounting purposes, and in the rest of this study, a pension plan is definedto be overfunded (underfunded) if the FVPA is larger (smaller) than the PBO. It is clearthat the same dollar amount of underfunding has different effects for these variablesdepending on the size of the firm. In order to solve this problem, the funding statusneeds to be appropriately normalized. In order to measure the funding status of thepension plans, the procedure used by Franzoni and Marín (2006) is used. They chooseto divide the difference between the FVPA and the PBO by market capitalization at the