Human capital, pension information and firm valuation

We demonstrate that the reported pension information in the notes to financial statements captures human capital, in addition to the compensation expense and accounting assets/liabilities information that it is purported to represent. In explaining prices (returns), we document that the service cost for defined benefit pension firms and the pension cost for defined contribution pension firms have consistently positive coefficients that can be attributed to capturing the sustainability (growth) of human capital. This finding confirms the existence of service cost anomaly and extends to pension cost for defined contribution plans. The human capital hypothesis is supported by the finding that the coefficients of service cost (for defined benefit plans) and pension cost (for defined contribution plans) are more (less) positive for firms that are likely to have more (less) sustainable human capital. Further, in a balance-sheet-based analysis where service cost is absent, the valuation of pension assets and liabilities is biased by the omitted human capital variable. Our results are robust to sensitivity tests taking into account multi-collinearity, scale effects, standard errors, outliers, and omitted variables.