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 post-retirement benefit (PRB) liability components, and annual PRB cost components to explain cross-sectional variation in market-to-book ratios. SFAS No. 106 requires disclosure 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 the measurement error variance in the estimation of the PRB liability and cost. Results indicate that information on PRB liability is value-relevant conditioned on earnings and pension information. When both cost and liability components are included in the model, information on cost components is value-relevant, while 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