We document equity market reactions to an exogenous increase in expected balance sheet volatility – the time-series variation in equity book values. Our study is motivated by recent trends in accounting standard setting towards a ‘balance sheet approach’, which increases balance sheet volatility. Prior work has established theoretically that increased balance sheet volatility can potentially affect firm value through opposite channels: by reducing contracting usefulness while increasing transparency. Using the revised pension accounting standard IAS 19R as our empirical setting, we find negative average stock price reactions to events increasing the likelihood of an accounting change that would amplify balance sheet volatility for affected firms. In the cross-section, these abnormal event returns vary predictably, i.e., are incrementally more (less) negative for firms with relatively larger defined benefit plans (firms with higher pension investment risk). These findings are consistent with increased balance sheet volatility imposing greater net costs on firms with larger exposure, reflecting the lower contracting usefulness of volatile equity book values. In contrast, the positive market reactions for firms with higher pension investment risk suggest benefits emanating from increased transparency. These results are robust to a number of sensitivity tests and collectively suggest that investors anticipate the firm value effects of increased balance sheet volatility in ways predicted by accounting theory.