A Structural Analysis of Pension Disclosures Under SFAS 87 and Their Relation to Share Prices

When pricing common shares, investors do not assign the same earnings multiple to all components of pension cost. And these multiples differ from the multiple assigned to earnings before pension expense. In particular, both return on plan assets and the interest cost components tend to be assigned higher multiples than earnings before pension expense. Moreover, the market appears to assign a multiple of zero to the amortization of the transition asset. Earnings analysis obviously constitutes more than just the bottom line; careful analysis of earnings components and of the relative importance assigned to those components is also involved.