The Impact of Liabilities for Retiree Health Benefits on Share Prices

Abstract

Health insurance provided by corporations to retired employees represents an important benefit to retirees and a significant and growing expense to employers. If liabilities for retiree health benefits have already reduced share prices dollar-for-dollar or at least in a similar manner to other liabilities, there would be little cause for concern that the introduction of new, more revealing, accounting standards for these benefits would lead to financial pressure on companies to redi.ce or cancel benefits. This study identifies firms as sponsoring or not sponsoring retiree health plans, and liabilities for retiree health benefits are estimated using the framework of the new accounting pronouncement on nonpension postretirement benefits. Stock value is regressed on several independent variables, including estimated retiree health liability. The results clearly suggest that retiree health liabilities impact stock prices. Furthermore, some evidence indicates that the impact may be less than balance sheet liabilities. This latter finding is consistent with market expectations that the firms or the federal government will take actions to reduce future payouts of health benefits to retirees by corporate sponsors, although it also may be due in part to measurement error associated with the variable for retiree health liabilities.

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