Disclosure of Pension Asset Allocation and Expected Rate of Return Management

56 Pages Posted: 15 Jan 2016

See all articles by Seokyoun Hwang

Seokyoun Hwang

CUNY, College of Staten Island

Bharat Sarath

Rutgers, The State University of New Jersey - Accounting

Date Written: November 27, 2015

Abstract

This study examines whether expected rate of return (ERR) manipulation is related to disclosure of pension asset allocation. FAS 132R(1), which requires firms to disaggregate the detailed categories of pension asset allocation, provides a natural experiment for studying the effect of enhanced transparency on firm behavior. We posit that firms discretionarily assume higher ERR by using the opaque disclosure under the old standard, and adjust biased ERR downward under the greater reporting transparency. The hand-collected data allow us to identify the extent of disclosure variation under the two different reporting regimes. We find that opaque disclosure of plan asset allocation is associated with ERR management. Specifically, for firms with poor disclosure, mandated transparency in pension asset allocation plays a vital role in reducing the ERR management. We also find that ERR management is facilitated by the opaque disclosure even under the new reporting regime. Particularly, we find that firms tend to assume higher ERR through the opaque disclosure when they disaggregate the indirectly invested funds with no description of underlying asset classes.

Keywords: pension assumptions, expected rate of return, earnings management, disclosure, pension asset allocation

JEL Classification: M41

Suggested Citation

Hwang, Seokyoun and Sarath, Bharat Sarrukai, Disclosure of Pension Asset Allocation and Expected Rate of Return Management (November 27, 2015). Available at SSRN: https://ssrn.com/abstract=2715199 or http://dx.doi.org/10.2139/ssrn.2715199

Seokyoun Hwang (Contact Author)

CUNY, College of Staten Island ( email )

School of Business 3N 227
2800 Victory Blvd
New York, NY 13104
United States
301-300-2007 (Phone)

Bharat Sarrukai Sarath

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

94 Rockafeller Road
Piscataway, NJ 08854
United States

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