Determinants of Expected Rate of Return on Pension Assets: Evidence from the UK

45 Pages Posted: 30 May 2007

See all articles by Yong Li

Yong Li

King's College London

Paul J. M. Klumpes

Nottingham Trent University

Date Written: March 2007

Abstract

This study explores whether UK managers behave opportunistically when determining the expected rate of return on pension assets (ERR) during a five year period (1998-2002), and whether this behavior has changed with the transitional adoption of new UK pension accounting rule FRS 17. The empirical results confirm predictions that those UK firms sponsoring pension plans with tightening debt covenants inflate their reported ERRs during the study period (1998-2002). In addition, we find evidence suggesting that contracting cost incentives underlying reported ERRs appear to be stronger during the FRS 17 transitional adoption period. However, we do not find evidence suggesting that management select the ERR opportunistically to smooth earnings.

Keywords: pension accounting, ERR, managerial opportunism, contracting cost incentives

JEL Classification: M41

Suggested Citation

Li, Yong and Klumpes, Paul J.M., Determinants of Expected Rate of Return on Pension Assets: Evidence from the UK (March 2007). Available at SSRN: https://ssrn.com/abstract=989559 or http://dx.doi.org/10.2139/ssrn.989559

Yong Li (Contact Author)

King's College London ( email )

150 Stamford Street
London, SE1 9NN
United Kingdom

Paul J.M. Klumpes

Nottingham Trent University ( email )

Burton Street
Nottingham NG1 4BU, NG1 4LN
United Kingdom

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