Investigating the Market’s Efficiency Regarding Pension Deficits After the Implementation of SFAS No. 158

In 2006 SFAS No. 158 was introduced with the objective of increasing the transparency of accounting for defined benefit pension plans. This study examines whether firms with underfunded DB pension plans continued to be overvalued by the equity market after the implementation of this new standard. The findings suggest that while firms with large pension deficits are no longer overpriced, firms with small deficits are now overpriced by as much as 12% per year. This indicates that despite some improvements the market is still not efficient in valuing pension related items.