Regulatory Oversight and Tradeoffs in Earnings Management: Evidence from Pension Accounting

49 Pages Posted: 15 Jun 2014 Last revised: 15 Apr 2020

See all articles by James P. Naughton

James P. Naughton

University of Virginia, Darden School of Business

Date Written: October 30, 2018

Abstract

I develop approaches that quantify the use of discretion for the three main assumptions used for the financial reporting of defined benefit pension obligations: the expected return, the discount rate, and the compensation rate. I then apply these approaches to two regulatory events that affected a different subset of these three assumptions. Across both settings, my analyses indicate that firms reduced discretion in response to regulatory scrutiny—but only in those assumptions targeted by the regulatory event. In contrast, I find that firms increased the use of discretion in the other assumptions, consistent with a substitution effect. I also find that the use of discretion in the discount rate and compensation rate are approximately two to three times more effective at changing reported earnings than the use of discretion in the expected return. Collectively, my analyses highlight the interdependence of the three main pension assumptions and the relative weakness of the expected return as an earnings management tool.

Keywords: pension accounting, disclosure, earnings management, SFAS132, regulatory oversight

JEL Classification: G3, J32, M41, M43, M44, M45

Suggested Citation

Naughton, James P., Regulatory Oversight and Tradeoffs in Earnings Management: Evidence from Pension Accounting (October 30, 2018). Available at SSRN: https://ssrn.com/abstract=2450138 or http://dx.doi.org/10.2139/ssrn.2450138

James P. Naughton (Contact Author)

University of Virginia, Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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