The Economic Consequences of Accounting Standards: Evidence from Risk-Taking in Pension Plans

The Accounting Review, conditionally accepted

64 Pages Posted: 12 Jul 2015 Last revised: 1 Aug 2017

See all articles by Divya Anantharaman

Divya Anantharaman

Rutgers, The State University of New Jersey - Accounting & Information Systems

Elizabeth Chuk

University of California, Irvine - Paul Merage School of Business

Date Written: April 15, 2017

Abstract

Pension experts have long conjectured that pension accounting rules encourage firms to invest pension assets in risky asset classes (Zion and Carcache 2003, Gold 2005). The recent passage of IAS 19 Employee Benefits (Revised) (hereafter, “IAS 19R”) marks a fundamental shift in pension accounting, by removing from pension expense the use of a managerial estimate that is directly tied to the riskiness of plan assets (i.e., the expected rate of return (ERR) on plan assets), and replacing it with a managerial estimate that is unrelated to plan asset riskiness (i.e., the discount rate). The use of the ERR creates a financial reporting benefit for risk-taking, where sponsors recognize in reported income the benefits of risk-taking (via a higher ERR, which reduces pension expense), but not the costs of risk-taking (i.e., higher volatility in actual returns). Exploiting the quasi-experimental setting created by this shift in a difference-in-differences research design, we demonstrate that a sample of Canadian firms affected by IAS 19R reduces risk-taking in pension investments post-IAS 19R, compared to a control sample of US firms unaffected by IAS 19R. These findings provide some of the first empirical evidence on the economic consequences of the IAS 19R mandate eliminating the ERR-based pension accounting model, which still applies to US GAAP.

Keywords: Pension accounting, pension smoothing, pension asset allocation, IAS 19

JEL Classification: M40, M41

Suggested Citation

Anantharaman, Divya and Chuk, Elizabeth, The Economic Consequences of Accounting Standards: Evidence from Risk-Taking in Pension Plans (April 15, 2017). The Accounting Review, conditionally accepted, Available at SSRN: https://ssrn.com/abstract=2629277 or http://dx.doi.org/10.2139/ssrn.2629277

Divya Anantharaman

Rutgers, The State University of New Jersey - Accounting & Information Systems ( email )

1 Washington Park
#916
Newark, NJ 07102
United States

Elizabeth Chuk (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

University of California, Irvine
Irvine, CA California 92697-3125
United States

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