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Earnings Manipulation and Managerial Investment Decisions: Evidence from Sponsored Pension Plans

  • Daniel Bergstresser
  • Mihir A. Desai
  • Joshua Rauh

Managers appear to manipulate firm earnings when they characterize pension assets to capital markets and alter investment decisions to justify, and capitalize on, these manipulations. We construct a measure of the sensitivity of reported earnings to the assumed long-term rate of return on pension assets. Managers are more aggressive with assumed long-term rates of return when their assumptions have a greater impact on reported earnings. Managers also increase assumed rates of return as they prepare to acquire other firms and as they exercise stock options, further confirming the opportunistic nature of these increases. Decisions about assumed rates of return, in turn, influence asset allocation within pension plans. Instrumental variables results suggest that a 25 basis point increase in the assumed rate of return is associated with a 5% increase in equity allocation. Taken together, these results suggest that earnings manipulation arising from managerial motivations influences significant managerial investment decisions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10543.

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Date of creation: Jun 2004
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Publication status: published as Bergstresser, Daniel, Mihir Desai and Joshua Rauh. "Earnings Manipulation, Pension Assumptions, And Managerial Investment Decisions," Quarterly Journal of Economics, 2006, v121(1,Feb), 157-195.
Handle: RePEc:nbr:nberwo:10543
Note: CF LS AP PE
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  1. Yermack, David, 1997. " Good Timing: CEO Stock Option Awards and Company News Announcements," Journal of Finance, American Finance Association, vol. 52(2), pages 449-76, June.
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  9. Julia Lynn Coronado & Steven A. Sharpe, 2003. "Did Pension Plan Accounting Contribute to a Stock Market Bubble?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 323-371.
  10. Stein, Jeremy C., 1988. "Takeover Threats and Managerial Myopia," Scholarly Articles 3708937, Harvard University Department of Economics.
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