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Earnings Manipulation, Pension Assumptions and Managerial Investment Decisions

43 Pages Posted: 29 May 2004  

Daniel Bergstresser

Harvard Business School

Joshua D. Rauh

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2005

Abstract

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

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

Daniel B. Bergstresser

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Joshua D. Rauh

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mihir A. Desai (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)

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