Regulatory Oversight and Trade-Offs in Earnings Management: Evidence from Pension Accounting

Review of Accounting Studies, Forthcoming

49 Pages Posted: 31 Jan 2019

See all articles by James P. Naughton

James P. Naughton

University of Virginia, Darden School of Business

Date Written: October 5, 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 Trade-Offs in Earnings Management: Evidence from Pension Accounting (October 5, 2018). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3322659

James P. Naughton (Contact Author)

University of Virginia, Darden School of Business ( email )

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
61
Abstract Views
809
rank
423,945
PlumX Metrics