Voluntary Sensitivity Risk Disclosure

This paper examines the voluntary disclosure of an important liability-driven risk on the balance sheet. Using hand-collected data for a sample from 2005 to 2010 of FTSE 350 firms that sponsor defined benefit plans, we document the practice of voluntary risk disclosure in the form of sensitivities of defined benefit obligations (DBO) to actuarial assumptions. While we obtain only weak evidence that the level of DBO sensitivities is priced by the market, we find that the market lowers its expected return on disclosing firms, despite investors’ ability to estimate DBO sensitivities using known firm and pension plan characteristics. We further show by a path analysis that the reduction in the cost of capital is primarily driven by an information precision effect rather than an information distribution effect. In the wake of standard setters mandating pension sensitivity disclosure, the current low or even negative interest rate environment, and the ballooning pension liabilities in recent years, our results provide important empirical insights to the economic consequences of pension sensitivity risk disclosures.