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Pension plan accounting estimates and the freezing of defined benefit pension plans

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  • Comprix, Joseph
  • Muller III, Karl A.
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    Abstract

    This study provides evidence that, when "hard" freezing their defined benefit pension plans, employers select downward biased accounting assumptions to exaggerate the economic burden of their benefit plans. Downward biased expected rates of return and discount rates allow managers to increase reported pension expenses and, for discount rates, allow managers to increase reported pension liabilities. We find that prior to the Sarbanes-Oxley Act, both rates are downward biased when firms freeze their plans, whereas after SOX the bias is lower. This finding is consistent with managers opportunistically biasing pension estimates to obtain labor concessions during periods of reduced regulatory scrutiny.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 51 (2011)
    Issue (Month): 1-2 (February)
    Pages: 115-133

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    Handle: RePEc:eee:jaecon:v:51:y:2011:i:1-2:p:115-133

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    Web page: http://www.elsevier.com/locate/jae

    Related research

    Keywords: Defined benefit pension plans Pension plan freeze Expected rate of return assumption Discount rate assumption Sarbanes-Oxley Act;

    References

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    1. Zvi Bodie & Jay O. Light & Randall Morck & Robert A. Taggart, Jr., 1986. "Funding and Asset Allocation in Corporate Pension Plans: An Empirical Investigation," NBER Working Papers 1315, National Bureau of Economic Research, Inc.
    2. Comprix, Joseph & Muller III, Karl A., 2006. "Asymmetric treatment of reported pension expense and income amounts in CEO cash compensation calculations," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 42(3), pages 385-416, December.
    3. Mittelstaedt, H. Fred, 1989. "An empirical analysis of the factors underlying the decision to remove excess assets from overfunded pension plans," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 11(4), pages 399-418, November.
    4. Mitchell A. Petersen, 2005. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," NBER Working Papers 11280, National Bureau of Economic Research, Inc.
    5. Zhang, Ivy Xiying, 2007. "Economic consequences of the Sarbanes-Oxley Act of 2002," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 44(1-2), pages 74-115, September.
    6. Daniel Bergstresser & Mihir Desai & Joshua Rauh, 2006. "Earnings Manipulation, Pension Assumptions, and Managerial Investment Decisions," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 121(1), pages 157-195, 02.
    7. DeAngelo, Harry & DeAngelo, Linda, 1991. "Union negotiations and corporate policy *1: A study of labor concessions in the domestic steel industry during the 1980s," Journal of Financial Economics, Elsevier, Elsevier, vol. 30(1), pages 3-43, November.
    8. Tepper, Irwin, 1981. "Taxation and Corporate Pension Policy," Journal of Finance, American Finance Association, vol. 36(1), pages 1-13, March.
    9. (Xuefeng) Jiang, John & Petroni, Kathy R. & Yanyan Wang, Isabel, 2010. "CFOs and CEOs: Who have the most influence on earnings management?," Journal of Financial Economics, Elsevier, Elsevier, vol. 96(3), pages 513-526, June.
    10. Benjamin M. Friedman, 1983. "Pension Funding, Pension Asset Allocation, and Corporate Finance: Evidence from Individual Company Data," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 107-152 National Bureau of Economic Research, Inc.
    11. Petersen, Mitchell A, 1992. "Pension Reversions and Worker-Stockholder Wealth Transfers," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 1033-56, August.
    12. Irwin Tepper, 1981. "Taxation and Corporate Pension Policy," NBER Working Papers 0661, National Bureau of Economic Research, Inc.
    13. Thomas, Jacob K., 1989. "Why do firms terminate their overfunded pension plans?," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 11(4), pages 361-398, November.
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    Cited by:
    1. Raimond Maurer & Olivia S. Mitchell & Ralph Rogalla & Ivonne Siegelin, 2014. "Accounting and Actuarial Smoothing of Retirement Payouts in Participating Life Annuities," NBER Working Papers 20124, National Bureau of Economic Research, Inc.
    2. Robert Novy-Marx & Joshua D. Rauh, 2012. "The Revenue Demands of Public Employee Pension Promises," NBER Working Papers 18489, National Bureau of Economic Research, Inc.
    3. Choy, Helen & Lin, Juichia & Officer, Micah S., 2014. "Does freezing a defined benefit pension plan affect firm risk?," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 57(1), pages 1-21.
    4. An, Heng & Huang, Zhaodan & Zhang, Ting, 2013. "What determines corporate pension fund risk-taking strategy?," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 597-613.

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