INFORMATION CONTENT OF CHANGES IN PENSION PLAN FUNDING STATUS AND LONG-TERM DEBT

This study investigates whether investors efficiently incorporate changes in defined benefit pension plan information in stock prices. The sample is comprised of public US companies with available data from 1980 to 2005. Fama and French three factor (1993) and four factor models results reveal that the market inefficiently incorporates changes in defined benefit pension plan information. The results suggest that investors are not paying enough attention to the implications of the changes in funding status for future earnings and cash flows. Investors’ reactions to changes in defined benefit pension plan information were compared to reactions to changes in long-term debt account ratios. The results reveal that the market is also inefficient incorporating changes in long-term debt information. Hedge-portfolio tests are performed to verify if there is an opportunity to outperform the market by identifying market inefficiencies. The hedge-portfolio results support the notion that the market overprices firms that have the most negative changes in funding ratio and increases in long-term debt ratio.