Faculty Publications


Accounting regulation and information asymmetry in the capital markets: An empirical study of Accounting Standard SFAS no.87.

SelectedWorks Author Profiles:

Wenshan Lin

Publication Date



The Financial Accounting Standards Board (FASB) contends that the pension disclosures mandated by Statement of Financial Accounting Standards No. 87 (SFAS 87): Employers' Accounting for Pensions provide useful information. However, from a societal perspective, usefulness is a necessary but not a sufficient condition for accounting regulation. Instead, accounting regulation is motivated primarily by the need to reduce information asymmetry. This study examines the effect of SFAS 87 disclosures on information asymmetry (as reflected in the bid-ask spread) in the capital markets.

This study uses both basic and self-selection regression models to test three hypotheses about the effect of SFAS 87 disclosures on information asymmetry during 1985-1987. Both types of models test the hypotheses after controlling for changes in the inventory holding and order processing costs of the spread, while the self-selection models also control for potential self-selection bias.

The results suggest that the first-time disclosure of SFAS 87 data significantly reduced information asymmetry by reducing the informed trading cost of the spread both with and without correction for self-selection bias. The decrease in the spread around the release of the first 10-Ks to contain SFAS 87 data is significantly greater than the decrease around the release of other 10-Ks for both early and late adopters of SFAS 87. Furthermore, the magnitude of SFAS 87 pension variables is negatively associated with changes in the spread. These findings support the mandatory nature of SFAS 87 pension disclosures. Finally, the two groups exhibit systematic financial differences, and the spread changes for their stocks are associated with different pension variables. The substantial financial impact of and the long transition period for SFAS 87 could have deprived market participants of timely information about late adopters and may have had an adverse effect on financial statements comparability. The evidence suggests that the FASB needs to address issues such as the cost-benefits of mandatory disclosures and financial statements comparability as it considers future accounting standards.


University of North Texas

Creative Commons License

Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

This document is currently not available here.