Economic Consequences of Mandated Accounting Disclosures: Evidence from Pension Accounting Standards

I examine whether firms alter their behavior in response to changes in accounting standards that mandate new financial statement disclosures. While prior research suggests that new recognition rules lead to changes in firm behavior, there is limited evidence that disclosure rules can impact firm behavior. This study helps to fill this void in the literature by examining the economic consequences of the mandated disclosures of pension asset composition required under SFAS 132R. Under pension accounting rules, the composition of pension assets is a key determinant of the assumed expected rate of return (ERR) on pension assets. I find that when firms disclose asset composition for the first time under SFAS 132R, firms that were previously using upward-biased ERRs respond by increasing asset allocation to high-risk securities and/or reducing the ERR assumption. While disclosure requirements arguably create less powerful incentives to alter firm decisions than recognition requirements, these findings offer evidence that firms alter behavior in response to disclosure standards.