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

Author

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  • Comprix, Joseph
  • Muller, Karl A.

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.

Suggested Citation

  • Comprix, Joseph & Muller, Karl A., 2011. "Pension plan accounting estimates and the freezing of defined benefit pension plans," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 115-133.
  • Handle: RePEc:eee:jaecon:v:51:y:2011:i:1:p:115-133
    DOI: 10.1016/j.jacceco.2010.06.003
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    References listed on IDEAS

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    Cited by:

    1. Maurer, Raimond & Mitchell, Olivia S. & Rogalla, Ralph & Siegelin, Ivonne, 2016. "Accounting and actuarial smoothing of retirement payouts in participating life annuities," Insurance: Mathematics and Economics, Elsevier, vol. 71(C), pages 268-283.
    2. repec:eee:reacre:v:26:y:2014:i:2:p:217-221 is not listed on IDEAS
    3. Yong-Chul Shin & Kun Yu & Neil Fargher, 2016. "Do investors misprice components of net periodic pension cost?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(3), pages 845-878, September.
    4. Kun Yu, 2016. "Excess of the PBO over the ABO and hard pension freezes," Review of Quantitative Finance and Accounting, Springer, vol. 46(4), pages 819-846, May.
    5. repec:spr:reaccs:v:22:y:2017:i:3:d:10.1007_s11142-017-9404-4 is not listed on IDEAS
    6. 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.
    7. Chen, Xuanjuan & Yao, Tong & Yu, Tong & Zhang, Ting, 2014. "Learning and incentive: A study on analyst response to pension underfunding," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 26-42.
    8. Dou, Yiwei & Khan, Mozaffar & Zou, Youli, 2016. "Labor unemployment insurance and earnings management," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 166-184.
    9. repec:eee:reacre:v:29:y:2017:i:2:p:159-166 is not listed on IDEAS
    10. 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.
    11. 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.
    12. 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.
    13. repec:eee:corfin:v:50:y:2018:i:c:p:505-518 is not listed on IDEAS
    14. repec:eee:advacc:v:29:y:2013:i:1:p:27-35 is not listed on IDEAS
    15. repec:eee:corfin:v:50:y:2018:i:c:p:519-537 is not listed on IDEAS

    More about this item

    Keywords

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

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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