Relative Measurement Errors among Alternative Pension Asset and Liability Measures
SYNOPSIS: This study investigates the measures of pension assets and liabilities disclosed under SFAS 87 to determine which most closely reflect those that investors implicitly assess when they value the firm. Several measures considered to have conceptual merit are disclosed under SFAS 87, but no single method has been deemed most appropriate. The attributes of the three asset and five liability measurement alternatives disclosed and the controversies surrounding the FASB's deliberations on these alternatives are considered in the research design. Because the pension asset and liability issues in SFAS 87 relate to measurement and reflect a variety of unresolved questions, an approach directly comparing measurement error across alternatives is used. The research design utilizes relevance and reliability, two primary accounting choice characteristics advanced by the FASB. These two attributes are operationalized by the variances and levels of differences between alternative measures and the implied investors' assessment. In most prior studies using cross sectional valuation to address a variety of research questions, a model is posited and then tested by using book values as substitutes for unobservable variables. The measurement error is considered an econometric problem. Although the valuation equation assumed here is also based on unobservable market values, the measurement error is modeled, and the impact of the measurement error