Value Relevance of Level-3 Fair Values: The Case of German Companies ’ Pension Accounting Information

Preliminary version, do not quote, do not circulate In this paper, we examine the value relevance of pension accounting information for a sample of German companies for the years 1999 to 2006. Because of a particular regulatory and taxation framework, German companies traditionally do not fund their defined benefit pension obligations externally. Thus, unlike companies from the U.S. or from other Anglo-Saxon countries many German companies show large net pension liabilities in their balance sheets. We make use of this situation and provide an in-depth analysis of the value relevance of German companies ’ level-3 pension obligation fair values. In line with Barth et al. (1993), and in contrast to Coronado and Sharpe (2003), we find that German companies ’ financial status related pension accounting information is more closely associated with stock prices than pension cost information. We find only weak direct evidence that fair value information on companies ’ pension positions are more value relevant than amounts that are smoothed as a result of the application of the corridor approach that used to be allowed under FAS 87 and is still allowed under IAS 19. However, our results also indicate that actuarial gains and losse