The effect of accounting aggregation on the value-relevance of financial disclosures: The case of SFAS No 106

This study uses SFAS No, 106 disclosures to investigate the abilities of postretirement benefit (PRB) liability components and cost components to explain cross-sectional variation in market-to-book ratios. SFAS No. 106 requires disclosures of the sensitivity of the PRB liability and cost to the health care cost trend rate. This study also examines the value-relevance of this new disclosure and its effect on reducing measurement error variance in the PRB information. Results indicate that PRB disclosures are value-relevant conditioned on earnings and pension information. When both cost and liability components are considered, information on cost components is useful, whereas information on liability components has only marginal explanatory power, When the measurement error in the PRB liability is reduced using the standard's sensitivity disclosures, the explanatory power of the liability components increases significantly.