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Choice of Pension Discount Rate in Financial Accounting adn Stock Prices

  • Takashi Obinata

    (Faculty of Economics, University of Tokyo)

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    Under present financial accounting standards, in Japan and in U.S., firms can hoose pension discount rates, which they use for earnings measurement, at their discretion. First, this paper investigates, what factors affect their choice of pension discount rates. The sample firms in this paper reduced their discount rates, when market interest rate declined in 1990s, more slowly than the tendency in the market. We analyze the causes of this delay by logit model. Regression results show that, given declining interest rate, the significant factor affecting the firmsf choice is not leverage, but profitability (return on equity: ROE). Second, this research investigates empirically how stock prices reflect the size of pension discount rate. Both unamortized pension obligations and pension expenses in the year are positively associated with stock prices. However, the coefficients for the firms, whose discount rates are higher than median, are smaller than those for the firms choosing lower rates. Those coefficients are not significantly different from zero. These results indicate that the firms, which chose lower pension discount rates, are valued higher. This asymmetric result is consistent with the first point in this paper, concerning the firmsf motives for pension discount rate choice.

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    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-82.

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    Length: 54 pages
    Date of creation: Jul 2000
    Date of revision:
    Handle: RePEc:tky:fseres:2000cf82
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    1. Francis, Jere R. & Reiter, Sara Ann, 1987. "Determinants of corporate pension funding strategy," Journal of Accounting and Economics, Elsevier, vol. 9(1), pages 35-59, April.
    2. Kothari, S. P. & Zimmerman, Jerold L., 1995. "Price and return models," Journal of Accounting and Economics, Elsevier, vol. 20(2), pages 155-192, September.
    3. Thomas, Jacob K., 1988. "Corporate taxes and defined benefit pension plans," Journal of Accounting and Economics, Elsevier, vol. 10(3), pages 199-237, July.
    4. Martin, Linda J. & Henderson, Glenn V., 1983. "On Bond Ratings and Pension Obligations: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(04), pages 463-470, December.
    5. Feldstein, Martin & Seligman, Stephanie, 1981. "Pension Funding, Share Prices, and National Savings," Journal of Finance, American Finance Association, vol. 36(4), pages 801-24, September.
    6. Francis, Jere R., 1987. "Lobbying against proposed accounting standards: The case of employers' pension accounting," Journal of Accounting and Public Policy, Elsevier, vol. 6(1), pages 35-57.
    7. Kormendi, Roger & Lipe, Robert, 1987. "Earnings Innovations, Earnings Persistence, and Stock Returns," The Journal of Business, University of Chicago Press, vol. 60(3), pages 323-45, July.
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