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Do Japanese firms systematically inflate expected rate of returns from defined benefit pension plans?

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  • Qin, Yiyi
  • Cai, Jun
  • Rhee, S. Ghon

Abstract

Japanese firms systematically inflate expected rate of returns (ERRs) on pension assets relative to several benchmark rates including actual rate of returns (ARRs), historical ARRs, and future expected ARRs. The Accounting Standard Board of Japan began requiring firms to disclose asset allocation in 2013. With asset allocation data, we are able to infer the implied equity returns assumed by managers to be 6.61% per annum. The implied cost of equity from the Gebhardt, Lee, and Swaminathan (2001) model is 5.47% per annum. The difference is highly significant. Japanese managers are more optimistic about equity returns in their pension assets than what typical market investors anticipate from the stock market. We finally construct accrual-based earnings opacity measures and find that Japanese firms with more opaque earnings are more inclined to manage pension parameters to boost reported earnings.

Suggested Citation

  • Qin, Yiyi & Cai, Jun & Rhee, S. Ghon, 2021. "Do Japanese firms systematically inflate expected rate of returns from defined benefit pension plans?," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:pacfin:v:68:y:2021:i:c:s0927538x19304962
    DOI: 10.1016/j.pacfin.2020.101321
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    Cited by:

    1. Goto, Shingo & Yanase, Noriyoshi, 2023. "Corporate governance and shareholder-employee risk-shifting: Evidence from corporate pension plan sponsors," Finance Research Letters, Elsevier, vol. 58(PA).
    2. Masaki KUSANO, 2022. "Recognition versus Disclosure and Managerial Discretion: Evidence from Japanese Pension Accounting," Discussion papers e-22-008, Graduate School of Economics , Kyoto University.

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    More about this item

    Keywords

    Defined benefit pension plans; Earnings management; Pension assumptions; Seasoned equity offerings; Impact on reported earnings;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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