The effect of SFAS 158 on the mispricing of pension plan funding

In this study, we examine whether the stock market pricing of the funding status of pension plans has improved after the adoption of SFAS 158. We find that the overvaluation of firms with severely underfunded pension plans, as documented in the prior literature, is no longer observed in the years after the adoption of SFAS 158. In addition, we find that the positive effect of SFAS 158 adoption in mitigating the mispricing of the funding status of pension plans is more pronounced for firms with a larger amount of off-balance-sheet disclosed pension liabilities. Overall, our results suggest that SFAS 158 has enhanced investors’ valuation of the funding status of pension plans, particularly due to the requirement for previously disclosed pension liabilities to be recognized on the balance sheet.