Fed: Pension Errors Puffed up Some S&P Stocks
The effect, according to the study, Did Pension Plan Accounting Contribute to a Stock Market Bubble?, was to distort US stock prices during the stock market bubble that lured many investors into the market only to face the run of the bears the last few years, according to an IPE news report
Fed economists
Julia Lynn Coronado and Steven Sharpe also found
that the market paid little attention to pension
information in the footnotes of company reports, though
that is now changing.
The Fed study
said pension-induced distortions rose
“considerably” in 2001 – “when the plunge in pension
net values had not yet shown through to pension cost
accruals.”
“The market appears to pay more attention to the
flow of pension-induced accruals reported in the income
statement that to the marked-to-market value of pension
assets and liabilities reported in the footnotes. The
results suggest that investors do not distinguish between
these two sources or earnings, at least not in the way
that one would expect in an efficient market.
If anything, the earnings associated with pension
accruals appear to receive a higher valuation multiple
than do core earnings,” Coronado and Sharpe wrote.
But that appears to be changing, the economists
say. “The greater scrutiny now being given to pension
accounting may already have begun to induce investment
professionals to differentiate between core and pension
earnings and devote greater attention to pension
balance sheets”
They estimate that as of early 2002, one in ten
of the firms in their sample that sponsored a DB
pension plan were at least 20% overvalued. They add
that pension earnings accounted for almost 25% of some
firms’ total expected earnings by 2001.