PRICE REACTION TOWARDS THE PENSION ACCOUNTING DISCLOSURES OF ACTUARIAL GAINS AND LOSSES

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1 PRICE REACTION TOWARDS THE PENSION ACCOUNTING DISCLOSURES OF ACTUARIAL GAINS AND LOSSES Nor Asma Lode Mohd. Atef Md. Yusof Uiversiti Utara Malaysia, Malaysia ABSTRACT This paper ivestigates whether stock prices react to the pesio accoutig disclosures of actuarial gais ad losses amog defied beefit pesio (DB) schemes adopters i Malaysia. Stadard evet methodology is adopted to examie the immediate price reactio of compaies that disclosed the actuarial gais ad losses for the year Usig market adjusted retur (MAR) Model, the results suggest that market is idifferet o the disclosures of actuarial gais or losses (i.e. either aggregate or segregate betwee compaies that disclosed actuarial gais ad losses) o disclosure date. A additioal aalysis further provides evidece that average abormal returs (AAR) for compaies that disclosed actuarial gais (i.e. average of 1.09%) are positive ad sigificat after the disclosure date, while the markets have egatively reacted towards the disclosures of actuarial losses before the disclosure date (i.e. day -3, -8, -10). These fidigs suggest that the disclosures actuarial gais are more welcomed by ivestors ad sigal good ews after the aoucemet date of aual reports. JEL Classificatios: M 40, M42, G 14 Keywords: Evet Study, Actuarial Gais ad Losses, AAR, Pesio Accoutig Correspodig Author s Address: asma@uum.edu.my INTRODUCTION Iteratioal Fiacial Reportig Stadards IFRS which were issued by Malaysia Accoutig Stadard Board MASB) have bee kow to the Malaysia busiess commuity ad accoutig society sice I particularly, pesio accoutig stadard that is MASB 29 Employee Beefits was issued by MASB to replace IAS 19 Employee Beefits. This stadard was amed FRS 119 Employee Beefits i The MASB further ameded FRS 119 Employee Beefits which became effective for periods begiig o or after 1 Jauary This stadard is further superseded by MFRS 119 (i.e. as ameded by IASB i Jue 2011) with effect from 1 Jauary Hece, this stadard provides a iterestig questio related to pesio accoutig disclosures: Does market react towards pesio accoutig disclosures, specifically actuarial gais ad losses for developig coutry like Malaysia? Actuarial gais ad losses AGL are the most volatile of pesio cost compoets (Collie ad Gao, 2011) which had bee disclosed i the fiacial statemets by 29 defied beefit pesio scheme adopters i Malaysia for the year 2009 (Lode ad Atef, 2014). They report that iformatio related to AGL is equally disclosed betwee gais ad losses, whereby 52% of compaies reported actuarial losses, while 48% of compaies reported actuarial gais. Origiatig o these sigificat issues related to disclosures of AGL ad usig efficiet market theory, this study predicts that stock market prices would ted to react more towards disclosures of actuarial gais tha actuarial losses. Specifically, this paper addresses two research questios. First, we ivestigate if the market reacts to the disclosures of actuarial gais ad losses, ad secod, we expect that actuarial gais sigal good ews to the market tha actuarial losses. The remaiig of the paper is orgaised as follows. Next sectio develops testable hypotheses. We the proceed with research method ad fidigs. Last sectio cocludes the paper. 805

2 LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT Actuarial gais ad losses (AGL) may arise i relatio to both the scheme assets ad liabilities, of which they may arise due to (a) differeces betwee the expected retur ad the actual retur (e.g. a sudde chage i the value of the scheme assets); (b) differeces betwee the actuarial assumptios uderlyig the scheme liabilities ad actual experiece durig the period ad the effect of chages i actuarial assumptios; ad (3) ay adjustmet ecessary resultig from the limit o the amout that ca be recogised as a asset i the balace sheet (FRS 17, para. 58). These actuarial gais ad losses AGL which are the most volatile of pesio cost compoets (Collie ad Gao, 2011) could result to stock price reactios. The efficiet market theory assumes that stock prices represet all available iformatio about compaies (Fama 1970). Ball ad Brow (1968) state that iformatio cotaied i the aual icome umber is useful whe it is related to stock prices. Cosequetly, Brow ad Kim (1993) hypothesise that o-earigs disclosures by maagers ad outsiders about ews other tha earigs (e.g. stock splits, takeover, ew order) of small firms geerally are good ews (i.e. a positive stock price reactio at the time of the iformatio disclosure). They fid that small firms o-earigs disclosures, o average, are associated with sigificat stock price icreases, whereas large firms o-earigs disclosures, o average, are valuatio-eutral. I cotrary, a study o The market reactio to 10-K ad 10-Q filigs ad to subsequet The Wall Street Joural Earigs aoucemets by Stice (1991) provides icosistet fidigs. He fids o sigificat market reactio, o average, at the SEC filig date, eve though the filig was the first public aoucemet of earigs for the quarter. However, the study provides evidece o the existece of a market reactio to the subsequet Wall Street Joural earigs aoucemet. The 21 st cetury studies provide further empirical fidigs. Li ad Ramesh (2009) fid a sigificat market reactio surroudig quarterly periodic reports whe their filig coicides with the first public disclosure of earigs although the 10-K reports i ot subsumed by earigs releases. De Fraco, Wog ad Zhou s (2011) suggest that more complex iformatio, such as that disclosed i the otes to the fiacial statemets, is priced as the time of the 10-K filig. Curretly, Curtis, McVay ad Whipple (2014) provide evidece that ivestors appear to efficietly price the trasitory gais at the time of the earigs aoucemet, but this partially reverses at the time of the subsequet 10-Q/K filig. I aother dimesio of studies that specifically examie the accoutig disclosures, Aderso-Wier (2010) idicates that the stock market does ot react to most of the idividual firm rakigs, but does react egatively to the Newsweek Rakigs as a whole. He further suggests that ivestors do ot cosider the relative evirometal choices of firms or that the stock market does ot like hearig about evirometal ews. Amir ad Ziv (1997) ivestigate the timig ad method of adoptio of SFAS No Employers Accoutig for Post-Retiremet Beefits other tha Pesios. They cosider the trade-offs betwee early ad o-early reportig of iformatio to be released uder ew accoutig stadards ad predict that discretioary revelatio of private iformatio costitutes good ews. Assumig that maagers have private iformatio about the accoutig stadard s valuatio effect ad usig the adoptio timig choices to covey this iformatio to the market, the market-adjusted retur o a portfolio of 1991 adopters was sigificatly larger tha the marketadjusted retur o a portfolio of 1993 adopters. I additio, Choi ad Tokuga (2007) study o market reactio to the disclosure of ufuded pesio beefit obligatio write-off policies i Japa. They fid that market adjusted abormal returs are sigificatly positive, largely led by early write-off policy adopters. The differetial respose i favor of immediate writeoffs is iterpreted as reflectig sigalig effect, i the sese that early write-off policy choice sigals fiacial affordability ad quick removal of obligatios, despite the egative impact o accoutig earigs. Ulike other studies, our mai focus is give to the stock price movemets over fairly arrow widows aroud the pesio accoutig disclosures of actuarial gais ad losses. Stock prices ca be used to gai sigificat isight ito corporatios ad how these disclosures specifically are associated with the stock prices of a compay. Therefore, this study aticipates that the Malaysia stock market behaves efficietly, that is the stock returs over the short widows surroudig the actuarial gais ad losses disclosures would be sigificat. The hypotheses are stated as follows: H1: Market positively reacts towards disclosures of pesio accoutig disclosures of actuarial gais ad losses; ad H2: Market reactios surroudig the pesio accoutig disclosures would be differet betwee the disclosures actuarial gais ad disclosures of actuarial losses. 1 The stadard was effective for fiscal year startig December 15, 1992 (Amir ad Ziv, 1997) 806

3 RESEARCH METHOD Stock prices ca be a useful idicatio to determie the relatioship betwee a evet ad a compay by lookig at the chage i the stock prices followig the evet becomes public iformatio. Fama, Fisher, Jese ad Roll (1969), amog others, adopted evet study methodologies to capture stock prices respod to ew iformatio. Usig the method origially proposed by Mac Kilay (1997) ad subsequetly adopted by Ishak ad Latif (2012), the preset study employs market adjusted returs models to ivestigate the markets reactio towards the pesio accoutig disclosures of actuarial gais ad losses. The first part of this study focuses o assessig the price effects of actuarial gais ad losses aoucemets i geeral, while the secod part ivestigates the stock markets reactios o disclosures of actuarial gais ad losses respectively. Malaysia firms listed o the Mai Board for the year 2009 that have disclosed actuarial gais ad losses are icluded i the sample. Apart from aual reports gathered through compaies websites, data such as EPS ad stock prices are collected from data stream. I additio, the Kuala Lumpur Composite Idex (KLCI) is used as the market or bechmark idex. Daily prices for each firm s ad the KLCI are gathered begiig from 10 days prior to the aoucemet date to 3 days after the aoucemet date. Daily retur for firm i o day t is computed as follow: R i,t = P i,t - P i,t-1 P i,t-1 where, R i,t : retur o firm i durig day t P i,t : price of firm i shares at the ed of day t P i,t-1 : price of firm i shares at the ed of day t-1 Similarly, the daily market retur R m,t = CI t - CI t-1 CI t-1 where, R m,t : Retur o Composite Idex durig day t CI t : Composite Idex level at the ed of day t CI t-1 : Composite Idex level at the ed of day t-1 Abormal returs for each day t are computed by comparig daily firms ad market s returs as follows: AR i, t Ri, t ( i i Rm, t where, AR i,t is the abormal retur of i firm o day t, R i,t is retur o firm i durig the period t, R m,t is retur o Composite Idex durig the period t Daily abormal returs o each evet day for all sample firms are cumulated ad the divided by the umber of observatios to give the average abormal returs (AAR) for the evet day t as summarised below: AAR t = 1 i 1 AR t i,t ) where is the umber of firms o day t. The variace for market adjusted retur is 2 (ARit AARt ) 2. AAR t is ormally distributed ad Z-statistics is equal to AAR t divided by i 1 square root of the variace. 807

4 FINDINGS AND DISCUSSIONS This sectio presets the descriptive aalysis ad the immediate price reactio towards the disclosure of pesio accoutig disclosures of actuarial gais ad losses amog DB pesio schemes adopters by Malaysia listed compaies. Descriptive Aalysis AGL had bee disclosed i the fiacial statemets by 29 compaies (i.e. 41%) of 70 compaies that adopted DB pesio schemes i Malaysia for the year The reported AGL is equally disclosed betwee gais ad losses, whereby 52% of compaies reported actuarial losses ad 48% of compaies reported actuarial gais. The highest actuarial losses of RM18 millio by Commerce Iteratioal Merchat Bakers, while the highest actuarial gais of RM7.4 millio were reported by Teaga Nasioal. The remaiig compaies (i.e. 59%) that did ot disclose pesio liabilities were ot metioig their AGL i the fiacial statemets. Price Reactio of Actuarial Gais ad Losses Disclosure The first part of the study is to assess the immediate price reactio o the disclosure of actuarial gais ad losses. Table 1 provides the average abormal returs (AAR) for day -10 to day +3 surroudig the disclosures of AGL usig Market Adjusted Retur Model (MAR). This Model idicates that abormal retur is a egative ad isigificat about 0.09% o the day of the amout of actuarial gais ad losses disclosed i the aual report. The results suggest that market is idifferet o the disclosures of actuarial gais or losses (i.e. either aggregate or segregate betwee compaies that disclosed actuarial gais ad losses) o disclosure date. These fidigs imply that ivestors do ot cosider the disclosures of AGL as sigificat evets as market reacts egatively to those disclosures. However, the market have positively reacted towards pesio accoutig disclosures of actuarial gais ad losses o o- disclosure dates (i.e. day 1 ad day -1, day -7 ad day - 9) at 5% sigificat level. These fidigs thus provide evidece o the existece of a market reactio towards actuarial gais ad losses before ad after the aoucemet of AGL i the aual reports. TABLE 1. AAR FOR DAY -10 TO DAY +3 SURROUNDING THE ANNOUNCEMENT OF \ ACTUARIAL GAINS AND LOSSES Actuarial Gais ad Losses Evet day AAR STDEV Z score P-value * * * * ** idicates sigificat at 1% level, * idicates sigificat at 5 % level 808

5 Table 2 compares the abormal returs from day -10 to + 3 based o compaies that had disclosed either actuarial gais or losses. The results suggest that market is idifferet either actuarial gais or losses had bee disclosed o day 0. This additioal aalysis further idicates that average abormal returs (AAR) for compaies that disclosed actuarial gais (i.e. average of 1.09%) ad actuarial losses (i.e. average of 0.7%) are positive ad sigificat after the disclosure date (i.e. day 1 to day 3). The positive sig of coefficiets idicate that actuarial gais ad losses disclosures are welcomed by ivestors. Nevertheless, the markets have egatively reacted towards the disclosures of actuarial losses before the disclosure date (i.e. day -3, -8, -10). This situatio explais that the ews related to actuarial losses reported by DB pesio schemes were already spread before the actual date of the AGL aouced i the aual reports. I coclusio, these fidigs suggest that disclosures of actuarial gais are more welcomed by ivestors ad sigal good ews due to more egative ad sigificat abormal returs for disclosures of actuarial losses before ad after the aoucemet date of aual report. A further test is coducted to determie whether average abormal returs are associated with aoucemets of earigs, whereby EPS is used as the variable i this test. The result shows that there is o sigificat associatio betwee AAR ad EPS amog compaies that disclosed actuarial gais ad losses. TABLE 2. AAR FOR DAY -10 TO DAY +3 SURROUNDING THE ANNOUNCEMENT OF ACTUARIAL GAINS AND ACTUARIAL LOSSES SEPARATELY Actuarial Gais Actuarial Losses Day AAR STDEV Z score P-value AAR STDEV Z score P-value *** *** ** *** ** *** * ** ** ** *** ** ** *** idicates sigificat at 1% level, ** idicates sigificat at 5 % level* idicates sigificat at 10% level 809

6 CONCLUSIONS Proceedigs of the Australasia Coferece o Busiess ad Social Scieces 2015, Sydey The preset study ivestigates the price reactios towards the pesio accoutig disclosures of actuarial gais ad losses amog DB pesio schemes adopters amog Malaysia listed compaies. Stadard evet methodology is adopted to examie the immediate price reactios of compaies that disclosed the actuarial gais ad losses for the year Usig market adjusted retur (MAR) Model, the results suggest that market is idifferet o the disclosures of actuarial gais or losses (i.e. either aggregate or segregate betwee compaies that disclosed actuarial gais ad losses) o disclosure date. A additioal aalysis further provides evidece that average abormal returs (AAR) of compaies that disclosed actuarial gais (i.e. average of 1.09%) ad actuarial losses (i.e. average of 0.7%) are positive ad sigificat after the disclosure date. Nevertheless, the markets have egatively reacted towards the disclosures of actuarial losses before the disclosure date (i.e. day -3, -8, -10). These fidigs suggest that the disclosures actuarial gais are more welcomed by ivestors ad sigal more good ews istead of disclosures of actuarial losses. However, the ews related to actuarial losses was already spread before the actual date of AGL aouced i the aual reports. There are several limitatios of the study. Firstly, other o-earigs factors may ifluece market price reactios, ad secodly, the results of the study should be iterpreted with cautio as limited observatios are used for the aalysis of pesio accoutig disclosures ad stock market reactios. A bigger sample ad loger evet widow study would probably yield differet results. Refereces Aderso-Weir. CH 2010, How does the stock market react to corporate evirometal ews?, Udergraduate Ecoomic Review, vol. 6, o. 1, pp Amir, E & Ziv, A 1997, Recogitio, disclosure, or delay: timig the adoptio of SFAS No.106, Joural of Accoutig Research, vol. 35, pp Ball, B & Brow, P 1968, A empirical evaluatio of accoutig icome umbers. Joural of Accoutig Research. vol, Autum, pp Brow, LD & Kim, K-J 1993, The associatio betwee oearigs disclosures by small firms ad positive abormal returs. The Accoutig Review, vol. 68, o. 3, pp Collie, B & Gao, J 2011, Pre-emptig FASB: mark to market pesio cost accouts, Practice Note of Russell Ivestmet,pp Choi, J-S & Tokuga Y 2007, Market reactio to the disclosure of ufuded pesio beefit obligatio write-off policies i Japa, Seoul Joural of Busiess, vol. 13, o. 2, pp Curtis, AB, McVay SE & Whipple BC 2014, The Disclosure of o-gaap earigs iformatio i the presece of trasitory gais, The Accoutig Review, vol. 89, o. 3, pp De Fraco, G, Wog F & Zhou Y 2011, Accoutig adjustmet ad the valuatio of fiacial statemet ote iformatio i 10-K filigs. The Accoutig Review, vol. 86, o. 5, pp Fama, EF 1970, Efficiet Capital Markets-Review of Theory ad Empirical Work. Joural of Fiace, vol. 25, o. 2, pp Fama, EF, Fisher L, Jese MC & Roll R 1969, The Adjustmet of Stock Prices to New Iformatio. Iteratioal Ecoomic Review, vol. 10. Reprited i Ivestmet Maagemet: Some Readigs, J. Lorie & R. Brealey, Editors (Praeger Publishers, 1972), ad Strategic Issues i Fiace, Keith Wad, Editor, (Butterworth Heiema, 1993). Li, E & Ramesh K 2009, Market reactio surroudig the filig of periodic SEC reports, The Accoutig Review, vol. 84, o. 4, pp

7 Lode, NA & Yusof MAM 2014, Pesio Accoutig Disclosures ad CMAR,i Recet Treds i Social ad Behaviour Scieces, eds FL Gaol, S Kadry, M Taylor & PS Li, CRS Press Taylor ad Fracis. 64: Malaysia Accoutig Stadard Board Fiacial reportig stadard 119, Employee beefits. MASB Malaysia Accoutig Stadard Board Fiacial reportig stadard 119, Employee beefits. MASB MacKilay, A. 1997, Evet Studies i Ecoomics ad Fiace. Joural of Ecoomics Literature: Vol. XXXV, pp Ishak, R. & Latif, AR 2012, CEO successio ad shareholders wealth i Malaysia public listed compaies. Procedia ad Social ad Behavioral Sciece, vol. 65, pp Stice, E 1991, The market reactio to 10-K ad 10-Q filigs ad to subsequet Wall Street Joural earig aoucemets, The Accoutig Review, vol. 66, pp

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