Human Capital, Pension Information, and Firm Valuation

We re-evaluate the historically equivocal evidence on the association between pension information and firm valuation by considering an alternate theoretical construct, human capital, which can be captured by pension information. We demonstrate that the reported pension information given in notes to the financial statements captures more than the simple compensation expense and pension asset and liability that they are purported to represent. We find that when we use a more complete model the service cost for Defined Benefit Pension (DBP) firms and the pension cost for Defined Contribution Pension (DCP) firms have consistently positive coefficients that can be attributed to capturing the human capital of the firm in regressions explaining price and the growth in the human capital of the firm in regressions explaining returns. However, when service cost is included the pension asset and liability have signs and magnitude consistent with simply capturing a typical accounting asset or liability. We do several specification tests that confirm the robustness of these results. We provide additional confirmation of the human capital hypothesis by examining firms that are likely to have more or less human capital and find that the coefficient on service cost is correspondingly more or less positive, consistent with it capturing human capital.