The persistence of UK versus US GAAP pension accounting differences and their relationship with share price returns

We provide empirical evidence which discriminates among the value-relevance of alternative pension accounting treatments to capital market participants by examining whether the assets and liabilities of pension funds is reflected in stock prices of UK firms who raise equity capital in US securities markets during 1996-1999 and are therefore required to report their pension exposure under both SFAS 87 and SSAP 24. We report cross-sectional or 'stock' relationships between interest rate changes and stock returns using both standard valuation methodology and an alternative 'variable effect' event study methodology proposed by Bodie et al. (1987) to study the valuation of pension claims. We find that stock returns are significantly associated with stock returns and prices of UK firms listed in US securities markets in 1994-1999. To the extent that it is more compatible with current US GAAP than current UK GAAP the pension accounting treatment proposed in FRS 17 provides potentially value relevant to capital market participants. We report cross-sectional or 'stock' relationships between interest rate changes and stock returns using both standard valuation methodology and an alternative 'variable effect' event study methodology proposed by Bodie et al. (1987) to study the valuation of pension claims. The empirical analysis holds even after controlling for timeliness and conservatism effects associated with other non-pension incremental differences between UK GAAP and US GAAP. We also examine the extent to which stock prices fully reflected the off-balance sheet item net over-(under-) funded pension liabilities during the four year period 1996-1999. We find that the stock market displays a general underreaction relative to the pension liability. Significant excess returns could have been earned by using the net pension liability as an instrument for portfolio selection.