VALUATION IMPLICATIONS OF RELIABILITY DIFFERENCES - THE CASE OF NONPENSION POSTRETIREMENT OBLIGATIONS

This paper examines whether accumulated postretirement benefit obligat ions (APBO) are useful in assessing equity market values. Using an ext ension of the econometric procedures outlined in Earth (1991), we use observed market capitalization rates on accounting measures to estimat e ''noise ratios'' defined as the ratio of measurement error variance to the total variance of the accounting measure, Differences in estima ted noise ratios are then used to make inferences about the relative r eliability of APBO and pension liability measures. We find that APBO a mounts are marginally significant in explaining cross-sectional differ ences in equity values, but are capitalized at a much lower rate than pension obligations, Consistent with predicted differences in reliabil ity, the estimated noise ratio for APBO is significantly greater than that for pension obligations, Moreover, we find estimated APBO noise r atios vary predictably across firms as a function of the retiree/activ e employee ratio and the likelihood of health care benefit reductions.