Full length articleAn empirical examination of mark-to-market accounting for corporate pension plans

Since 2010, a small but growing number of firms have voluntarily switched from the prevailing corridor approach (i.e., continuous smoothing) to a mark-to-market (MTM) alternative (i.e., immediate recognition) when accounting for pension gains and losses for their pension plans. This paper investigates the determinants of, and market reactions to, this voluntary adoption as well as its financial reporting and operational consequences. We find that larger firms and firms with greater deferred pension losses are more likely to adopt the MTM approach. On the other hand, we do not find an association between a firm's level of financial transparency or earnings volatility and MTM adoption. Further, our market tests reveal that investors reacted positively to the standalone announcements of MTM adoption and to the magnitude of the one-time pension loss adjustment upon adoption. Finally, in examining the consequences of MTM adoption, we find a reduction in earnings informativeness and an increase in plan assets allocated to debt relative to matched non-adopters. Overall, our study provides early evidence on the implications of MTM pension accounting.