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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.

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. Denise A. Jones, 2014. "When Do Companies Fund Their Defined Benefit Pension Plans?," Accounting & Taxation, The Institute for Business and Finance Research, vol. 6(1), pages 13-23.
    3. 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.
    4. Denise A. Jones, 2013. "Changes in the Funded Status of Retirement Plans after the Adoption of SFAS No. 158: Economic Improvement or Balance Sheet Management," Contemporary Accounting Research, John Wiley & Sons, vol. 30(3), pages 1099-1132, September.
    5. Fried, Abraham & Davis-Friday, Paquita & Davis, Harry Z., 2014. "The impact of duration on management's discount rate choice," Research in Accounting Regulation, Elsevier, vol. 26(2), pages 217-221.
    6. Söhnke M. Bartram, 2017. "Corporate Postretirement Benefit Plans and Real Investment," Management Science, INFORMS, vol. 63(2), pages 355-383, February.
    7. 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.
    8. J. Adam Cobb, 2019. "Managing the Conflicting Interests of Workers and Shareholders: Evidence from Pension-Assumption Manipulations," ILR Review, Cornell University, ILR School, vol. 72(3), pages 523-551, May.
    9. 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.
    10. Comprix, Joseph & Guo, Jun & Zhang, Yan & Zhou, Nan, 2017. "Setting expected rates of return on pension plan assets: New evidence on the influence of audit committee accounting experts," Research in Accounting Regulation, Elsevier, vol. 29(2), pages 159-166.
    11. 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.
    12. Michaelides, Alexander & Milidonis, Andreas & Papakyriakou, Panayiotis, 2019. "Corporate Pension Plan Funding Levels and Pension Assumptions," CEPR Discussion Papers 13591, C.E.P.R. Discussion Papers.
    13. Joshua D. Rauh & Irina Stefanescu & Stephen P. Zeldes, 2020. "Cost Saving and the Freezing of Corporate Pension Plans," NBER Working Papers 27251, National Bureau of Economic Research, Inc.
    14. Rauh, Joshua D. & Stefanescu, Irina & Zeldes, Stephen P., 2020. "Cost saving and the freezing of corporate pension plans," Journal of Public Economics, Elsevier, vol. 188(C).
    15. 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.
    16. 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.
    17. Fahad, Nafiz & Ma, Nelson & Scott, Tom, 2020. "The consequences of discount rate selection for defined benefit liabilities," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(1).
    18. James P. Naughton, 2019. "Regulatory oversight and trade-offs in earnings management: evidence from pension accounting," Review of Accounting Studies, Springer, vol. 24(2), pages 456-490, June.
    19. Divya Anantharaman, 2017. "The role of specialists in financial reporting: Evidence from pension accounting," Review of Accounting Studies, Springer, vol. 22(3), pages 1261-1306, September.
    20. 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.
    21. Vafeas, Nikos & Vlittis, Adamos, 2018. "Independent directors and defined benefit pension plan freezes," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 505-518.
    22. Blankley, Alan I. & Comprix, Joseph & Hong, Keejae P., 2013. "Earnings management and the allocation of net periodic pension costs to interim periods," Advances in accounting, Elsevier, vol. 29(1), pages 27-35.
    23. Duygun, Meryem & Huang, Bihong & Qian, Xiaolin & Tam, Lewis H.K., 2018. "Corporate pension plans and investment choices: Bargaining or conforming?," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 519-537.
    24. Takafumi Sasaki, 2017. "Pension accrual management and research and development investment," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(4), pages 1127-1147, December.
    25. 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.

    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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