Economic Determinants of the Decision to Voluntarily Adopt Mark-to-Market Accounting for Pension Gains and Losses

59 Pages Posted: 4 Mar 2015

See all articles by Jaewoo Kim

Jaewoo Kim

University of Rochester - Simon Business School

Charles E. Wasley

Simon School, University of Rochester

Joanna S. Wu

University of Rochester - Simon Business School

Multiple version iconThere are 2 versions of this paper

Date Written: March 3, 2015

Abstract

Beginning in 2010 a number of firms voluntarily adopted mark-to-market (MTM) accounting for the actuarial gains and losses associated with their pension plans. That change required them to begin immediately reporting such gains or losses in their income statements and was in marked contrast to their previous policy which smoothed such gains or losses into income over time. A novel aspect of the change is that adopting firms gave up a reporting alternative with a built-in smoothing mechanism in exchange for one (MTM) that was expected to increase earnings volatility due to the unpredictable effect of (future) uncontrollable market factors on the firms’ future MTM adjustments. The paper tests two non-mutually exclusive explanations for firms’ adoption of MTM, an “increase transparency” explanation and a “managerial opportunism” explanation. Our results paint a nuanced picture of how the costs and benefits of different accounting policies vary across firms and reveal that both explanations are useful in explaining cross-sectional variation in the MTM adoption decisions. We further document that firms’ MTM accounting choices are interconnected with their voluntary disclosures of non-GAAP earnings.

Keywords: Accounting choice; Fair value accounting; Mark-to-market accounting; Pensions; Non-GAAP earnings measures

JEL Classification: M41

Suggested Citation

Kim, Jaewoo and Wasley, Charles E. and Wu, Joanna, Economic Determinants of the Decision to Voluntarily Adopt Mark-to-Market Accounting for Pension Gains and Losses (March 3, 2015). Simon Business School Working Paper No. FR 14-21. Available at SSRN: https://ssrn.com/abstract=2573036 or http://dx.doi.org/10.2139/ssrn.2573036

Jaewoo Kim (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Charles E. Wasley

Simon School, University of Rochester ( email )

Rochester, NY 14627
United States
585-275-3362 (Phone)
585-442-6323 (Fax)

Joanna Wu

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-160D
Rochester, NY 14627
United States
585-275-5468 (Phone)
585-442-6323 (Fax)

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