Earnings Manipulation and Managerial Investment Decisions: Evidence from Sponsored Pension Plans

50 Pages Posted: 17 Jun 2004

See all articles by Daniel Bergstresser

Daniel Bergstresser

Brandeis International Business School

Joshua D. Rauh

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

Mihir A. Desai

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

Date Written: June 2004

Abstract

Managers appear to manipulate firm earnings when they characterize pension assets to capital markets and alter investment decisions to justify, and capitalize on, these manipulations. We construct a measure of the sensitivity of reported earnings to the assumed long-term rate of return on pension assets. Managers are more aggressive with assumed long-term rates of return when their assumptions have a greater impact on reported earnings. Managers also increase assumed rates of return as they prepare to acquire other firms and as they exercise stock options, further confirming the opportunistic nature of these increases. Decisions about assumed rates of return, in turn, influence asset allocation within pension plans. Instrumental variables results suggest that a 25 basis point increase in the assumed rate of return is associated with a 5% increase in equity allocation. Taken together, these results suggest that earnings manipulation arising from managerial motivations influences significant managerial investment decisions.

Suggested Citation

Bergstresser, Daniel B. and Rauh, Joshua D. and Desai, Mihir A., Earnings Manipulation and Managerial Investment Decisions: Evidence from Sponsored Pension Plans (June 2004). NBER Working Paper No. w10543. Available at SSRN: https://ssrn.com/abstract=556530

Daniel B. Bergstresser

Brandeis International Business School ( email )

Waltham, MA 02454
United States
6174162324 (Phone)

Joshua D. Rauh

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Hoover Institution ( email )

Stanford, CA 94305-6010
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mihir A. Desai (Contact Author)

Harvard Business School - Finance Unit ( email )

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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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