Choice of Pension Discount Rate in Financial Accounting adn Stock Prices
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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