43 Pages Posted: 29 May 2004
Date Written: May 2005
Managers appear to manipulate firm earnings through their characterizations of pension assets to capital markets and alter investment decisions to justify, and capitalize on, these manipulations. Managers are more aggressive with assumed long-term rates of return when their assumptions have a greater impact on reported earnings. Firms use higher assumed rates of return when they prepare to acquire other firms, when they issue equity, when they are near critical earnings thresholds and when their managers exercise stock options. Changes in assumed returns, in turn, influence pension plan asset allocations. Instrumental variables analysis indicates that 25 basis point increases in assumed rates are associated with 5 percent increases in equity allocations.
Keywords: Earnings, Manipulation, Pensions, Defined Benefit Plans, Asset Allocation, Mergers
JEL Classification: M41, M43, M52, G23, G30, G11
Suggested Citation: Suggested Citation
Bergstresser, Daniel and Rauh, Joshua D. and Desai, Mihir A., Earnings Manipulation, Pension Assumptions and Managerial Investment Decisions (May 2005). Available at SSRN: https://ssrn.com/abstract=551681 or http://dx.doi.org/10.2139/ssrn.551681