Pension discount rate and investor sentiment
ISSN: 0307-4358
Article publication date: 23 May 2019
Issue publication date: 23 May 2019
Abstract
Purpose
The purpose of this paper is to examine how investor sentiment, proxied by Michigan consumer confidence index, affects the choice of defined benefit pension plan discount rates.
Design/methodology/approach
The authors use multivariate analysis to test our hypotheses. The dependent variable is defined pension plan discount rate and the testing variables are investor sentiment and a dummy variable representing underfunded status.
Findings
The authors find a negative and significant relation between investor sentiment and pension plan discount rate. During high (low) sentiment periods, pension discount rate tends to be adjusted downward (upward) discretionarily. Further analysis indicates the relationship between pension discount rate and investor sentiment is more pronounced for firms with underfunded pension plans. The results can be explained by limited attention effects, capital budgeting strategy and earning smoothing.
Practical implications
The empirical results of this study have important implications for corporate governance and regulation. Specifically, the results suggest the need for increased attention from boards of directors, auditors and regulators to reported pension liabilities, especially during periods of high investor sentiment when pension plan sponsors are more likely to adjust down pension discount rate and accordingly to increase pension liabilities.
Originality/value
The paper contributes to the extant literature by identifying investor sentiment as a new incentive of pension discount rate manipulation. The empirical results of this study also have important implications for corporate governance and regulation.
Keywords
Citation
Sun, F. and Wei, X. (2019), "Pension discount rate and investor sentiment", Managerial Finance, Vol. 45 No. 6, pp. 781-792. https://doi.org/10.1108/MF-05-2018-0209
Publisher
:Emerald Publishing Limited
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