Incremental versus Relative Information Content of Pension Liability

Abstract

This paper examines two issues related to pension accounting information. The first issue is the value relevance of pension accounting information in Japanese capital market. The result clearly indicates that pension assets, pension liabilities, and pension expenses are value relevant. The second issue is the measurement alternatives related to pension liabilities. To empirically analyze this question, I compare ABO and PBO from viewpoint of “incremental information content” vs. “relative information content”. I find evidence that PBO has incremental information content beyond ABO and also has greater relative information content than ABO. Japanese new pension accounting standard, Accounting standard for employee benefits, adopts PBO as pension liability measure. This study supports the new standard from viewpoint of investment decision usefulness.