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

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  • Comprix, Joseph
  • Muller, 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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    File URL: http://www.sciencedirect.com/science/article/pii/S0165410110000285
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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 ()
    Pages: 115-133

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    Handle: RePEc:eee:jaecon:v:51:y:2011:i:1: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;

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    Cited by:
    1. 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.
    2. Deng, Xin & Kang, Jun-koo & Low, Buen Sin, 2013. "Corporate social responsibility and stakeholder value maximization: Evidence from mergers," Journal of Financial Economics, Elsevier, vol. 110(1), pages 87-109.
    3. 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.
    4. 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.
    5. Choy, Helen & Lin, Juichia & Officer, Micah S., 2014. "Does freezing a defined benefit pension plan affect firm risk?," Journal of Accounting and Economics, Elsevier, vol. 57(1), pages 1-21.

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