Corporate Pension Plans and Earnings Management: Insights from Mergers and Acquisitions, Mandatory Contributions and International Evidences

企業養老金計畫與盈餘管理:公司並購 、法定繳款及國際實例的啟示

Student thesis: Doctoral Thesis

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Award date4 Sep 2019


This dissertation is composed of three essays. It is a comprehensive research on corporate pension plans and earnings management, with insights from mergers and acquisitions, mandatory contributions, and international evidences. The three chapters are trying to answers three questions: When will firms implement pension earnings managements? Are there regulations that rules the manipulations of pension assumptions and how did they work? Are there differences of pension earnings management patterns between international markets?

The first chapter is a study on pension earnings management, mergers and acquisitions, and pension disclosure standards using U.S. data. I show that managers do set higher rate of return assumptions on pension assets when facing mergers and acquisitions, and set lower ERR under the new pension accounting standards. However, managers also become more sensitive to opportunities to boost reported earnings by inflating ERR in both cases. Managers more actively exploit such opportunities when pension assets are large relative to earnings measures, i.e., when potential gains from earnings management are large.

The second chapter is a study on pension earnings management, mandatory contributions, and pension disclosure standards using U.S. data. While mergers and acquisitions turn out to be endogenous choice of firms’ investment decisions, mandatory contributions are documented as exogenous shift in firms’ internal resources. For underfunded defined benefit pension plans in which the market value of pension assets is smaller than the present value of future liabilities, firms are required by law to make mandatory contributions. Mandatory contributions represent an exogenous shock to internally generated cash flows and are associated with significant reduce in firms’ capital expenditures, increase in cost of capital, and negative stock market reactions. I find that firms inflate assumed returns on pension assets to boost their reported earnings when facing mandatory contributions. I also find that managers alter earnings management behavior, in the case of mandatory contributions, following the introduction of new pension disclosure standards under SFAS 132R that become effective on December 15, 2003. Meanwhile managers become more sensitive to exploit such earnings manipulations opportunities when facing mandatory contributions, or in post-SFAS 132R period despite the fact that firms indeed respond to SFAS 132R requirements and set a lower expected rate of returns in general.

The third chapter reveals evidences of pension earnings management for Japanese firms. In contrast to evidence from the U.S., I show that 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, I am 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. I 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.

    Research areas

  • defined benefit plans, earnings management, corporate finance