Firms' Choice of Estimation Parameters: Empirical Evidence from SFAS 106

J. OF ACCOUNTING, AUDITING AND FINANCE, Vol 11, No 3, Summer 1996

Posted: 13 Jun 1998

See all articles by Eli Amir

Eli Amir

Tel Aviv University

Elizabeth A. Gordon

Temple University - Department of Accounting

Abstract

This study explains the cross-sectional variation in firms' selected assumptions (discount rates and health care cost trend rates) used to measure the obligation for post-retirement benefits other than pensions (PRB) under SFAS No. 106. Our aim is to examine whether managements manger the reported PRB by choosing either too conservative or too aggressive estimation parameters. In addition, we examine whether investors value the firm's equity based on the cross-section median parameters or based on each firm's selected parameters. We find that firms with relatively larger PRB obligation and more leverage tend to select more aggressive (obligation-reducing) estimation parameters. We also find that firms that amended their PRB plans and firms with extreme earnings-price ratios tend to select more conservative (obligation-increasing) estimation parameters. Finally, we find that investors value the firm's equity using reported rather than adjusted estimation parameters.

JEL Classification: M41, M44, G12

Suggested Citation

Amir, Eli and Gordon, Elizabeth A., Firms' Choice of Estimation Parameters: Empirical Evidence from SFAS 106. J. OF ACCOUNTING, AUDITING AND FINANCE, Vol 11, No 3, Summer 1996, Available at SSRN: https://ssrn.com/abstract=2656

Eli Amir (Contact Author)

Tel Aviv University ( email )

312 Recanati Bldg.
69978 Tel Aviv
Israel
+972 3 640-8510 (Phone)
+972 3 640-7738 (Fax)

Elizabeth A. Gordon

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
2152046422 (Phone)

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