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1 – 10 of over 2000
Article
Publication date: 4 February 2014

Sergey Komissarov

The purpose of this paper is to address two questions: did adoption of Statements of Financial Accounting Standards No. 132(R) and No. 158 affect neutrality of the financial…

Abstract

Purpose

The purpose of this paper is to address two questions: did adoption of Statements of Financial Accounting Standards No. 132(R) and No. 158 affect neutrality of the financial reporting with regard to the disclosed expected rate of return (ERR) on pension assets assumptions, and did pension asset allocations change in response to the new recognition and disclosure requirements?

Design/methodology/approach

The author uses several measures of association between reported expected return and pension assets allocations to assess neutrality of the reported ERR. The series of tests explores changes in correlations between asset allocations and expected rates of return and changes in the implied risk premiums following adoption of Statements No. 132(R) and No. 158. Granger causality analysis is used to explore the second research question: did pension asset allocations change in response to the new recognition and disclosure requirements?

Findings

The empirical results are consistent with improved neutrality of financial reporting following adoption of Standard No. 132(R). There were no detectable changes in neutrality following adoption of Standard No. 158. While the data are consistent with portfolio allocations changing to a greater degree than did expected rates of return following Statement No. 132(R) adoption, the effect appears short-lived.

Originality/value

The overall results are consistent with Standard 132(R) having a positive effect on the neutrality of the reported ERR. Also, there is no evidence of persistent and systematic structuring of transactions around preferred financial reporting outcomes.

Details

Review of Accounting and Finance, vol. 13 no. 1
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 8 May 2018

Seokyoun Hwang and Bharat Sarath

The purpose of this paper is to examine whether the expected rate of return (ERR) management is related to disclosure of pension asset allocation. FAS 132R(1), which requires…

Abstract

Purpose

The purpose of this paper is to examine whether the expected rate of return (ERR) management is related to disclosure of pension asset allocation. FAS 132R(1), which requires firms to disaggregate the detailed categories of pension asset allocation, provides a natural experiment setting for investigating the effect of enhanced transparency on firm behavior.

Design/methodology/approach

The authors focus on the variation of voluntary disclosure and its effect on ERR management under the two different reporting regimes. The authors measure the variation of voluntary disclosure of the pension asset allocations in the pre-period of FAS 132R(1), by using the self-constructed disclosure score.

Findings

First, firms create flexibility in their choice of ERR through opaque disclosure of pension asset allocation. Next, firms with poor disclosures are more likely to adjust ERR downward when accounting standards require greater transparency, implying that, for firms with poor disclosures, mandated transparency in pension asset allocation plays a vital role in reducing the ERR management.

Research limitations/implications

The authors directly illustrate the impact of FAS 132R(1) on ERR management. The authors find that the impact of mandated transparency is not uniform across firms. Next, this study highlights the importance of disclosure in restricting managers’ earnings management motivation.

Originality/value

The authors hand collect the asset allocations under pre-FAS 132R(1) period from the 10-K pension footnotes for all S&P 500 firms, which allows the authors to identify the disclosure variation amongst the firms. Based on the variation of disclosure, the authors construct the ordinal measure of disclosure scores on which the testing indicator variables are built.

Details

Asian Review of Accounting, vol. 26 no. 2
Type: Research Article
ISSN: 1321-7348

Keywords

Article
Publication date: 1 December 2004

Philip Booth and George Matysiak

Examines the impact of using “unsmoothing” techniques on real estate data to take pension‐plan assetallocation decisions. It is generally believed that valuation‐based real…

1326

Abstract

Examines the impact of using “unsmoothing” techniques on real estate data to take pension‐plan assetallocation decisions. It is generally believed that valuation‐based real estate indices give rise to returns figures which are “smoothed” versions of the underlying transaction prices. Unsmoothing techniques can be used to develop real estate return data series that are believed to be a more accurate representation of underlying transaction prices. If this is done, the resulting data reveal greater volatility of real estate returns. When such data are applied to portfolio selection models, they often reveal a reduced allocation to real estate in efficient portfolios. Looks at the impact of unsmoothing data when taking pension‐plan assetallocation decisions. Finds here that the unsmoothed data are more closely correlated with pension plan liabilities. As a result, efficient pension plan portfolios sometimes contain more real estate, rather than less. In general, there is little change in the efficient real estate allocation. These results are very important. They reveal that so‐called “valuation smoothing” may distort property investment decisions less than is commonly thought.

Details

Journal of Property Investment & Finance, vol. 22 no. 6
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 28 June 2021

Yiyi Qin, Jun Cai and Steven Wei

In this paper, we aim to answer two questions. First, whether firms manipulate reported earnings via pension assumptions when facing mandatory contributions. Second, whether firms…

Abstract

Purpose

In this paper, we aim to answer two questions. First, whether firms manipulate reported earnings via pension assumptions when facing mandatory contributions. Second, whether firms alter their earnings management behavior when the Financial Accounting Standard Board (FASB) mandates disclosure of pension asset composition and a description of investment strategy under SFAS 132R.

Design/methodology/approach

Our basic approach is to run linear regressions of firm-year assumed returns on the log of pension sensitivity measures, controlling for current and lagged actual returns from pension assets, fiscal year dummies and industry dummies. The larger the pension sensitivity ratios, the stronger the effects from inflated ERRs on reported earnings. We confirm the early results that the regression slopes are positive and highly significant. We construct an indicator variable DMC to capture the mandatory contributions firms face and another indicator variable D132R to capture the effect of SFAS 132R. DMC takes the value of one for fiscal years during which an acquisition takes place and zero otherwise. D132R takes the value of one for fiscal years after December 15, 2003 and zero otherwise.

Findings

Our sample covers the period from June 1992 to December 2017. Our key results are as follows. The estimated coefficient (t-statistic) on DMC is 0.308 (6.87). Firms facing mandatory contributions tend to set ERRs at an average 0.308% higher. The estimated coefficient (t-statistic) on D132R is −2.190 (−13.70). The new disclosure requirement under SFAS 132R constrains all firms to set ERRs at an average 2.190% lower. The estimate (t-statistic) on the interactive term DMA×D132R is −0.237 (−3.29). When mandatory contributions happen during the post-SFAS 132R period, firms tend to set ERRs at 0.237% lower than they would do otherwise in the pre-SFAS 132R period.

Originality/value

When firms face mandatory contributions, typically firm experience negative stock market returns. We examine whether managers manage earnings to mitigate such negative impact. We find that firms inflate assumed returns on pension assets to boost their reported earnings when facing mandatory contributions. We also find that managers alter earnings management behavior, in the case of mandatory contributions, following the introduction of new pension disclosure standards under SFAS 132R that become effective on December 15, 2003. Under the new SFAS 132R requirement, firms need to disclose asset allocation and describe investment strategies. This imposes restrictions on managers' discretion in making ERR assumptions, since now the composition of pension assets is a key determinant of the assumed expected rate of return on pension assets. Firms need to justify their ERRs with their asset allocations.

Details

China Finance Review International, vol. 11 no. 4
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 1 March 2012

Kathryn E. Easterday and Tim V. Eaton

We examine and compare funding status, actuarial assumptions and asset investment allocations of defined benefit pension plans in the public and private sectors across time, using…

Abstract

We examine and compare funding status, actuarial assumptions and asset investment allocations of defined benefit pension plans in the public and private sectors across time, using information as reported under GASB and FASB. We find that pension plans in both sectors are underfunded and that inferences about pension funding in the public sector would be different if pension assets' fair values were required in the computation of funding status. Actuarial assumptions of public employee plans appear to be both more optimistic and less variable than those of private sector plans. Finally, we document that public sector plans allocate invested assets somewhat differently than in the private sector, although our findings do not confirm anecdotal reports of riskier pension investment strategies relative to the private sector.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 24 no. 2
Type: Research Article
ISSN: 1096-3367

Article
Publication date: 1 April 2006

Francesco Menoncin and Olivier Scaillet

The purpose of this paper is to study the asset allocation problem for a pension fund which maximizes the expected present value of its wealth augmented by the prospective…

2692

Abstract

Purpose

The purpose of this paper is to study the asset allocation problem for a pension fund which maximizes the expected present value of its wealth augmented by the prospective mathematical reserve at the death time of a representative member.

Design/methodology/approach

The paper applies the stochastic optimization technique in continuous time. In order to present an explicit solution it considers the case of both deterministic interest rate and market price of risk.

Findings

The paper demonstrates that the optimal portfolio is always less risky than the Merton's (1969‐1971) one. In particular, the asset allocation is less and less risky until the pension date while, after retirement of the fund's representative member, it becomes riskier and riskier.

Practical implications

The paper shows the best way for managing a pension fund portfolio during both the accumulation and the decumulation phases.

Originality/value

The paper fills a gap in the optimal portfolio literature about the joint analysis of both the actuarial and the financial framework. In particular, it shows that the actuarial part strongly affects the behaviour of the optimal asset allocation.

Details

Managerial Finance, vol. 32 no. 4
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 14 November 2016

Stéphane Hamayon, Florence Legros and Yannick Pradat

The authors aim to demonstrate the importance of taking into account “mean reversion” in asset prices and show that this type of modeling leads to a high share of equities in…

Abstract

Purpose

The authors aim to demonstrate the importance of taking into account “mean reversion” in asset prices and show that this type of modeling leads to a high share of equities in pension funds’ asset allocations.

Design/methodology/approach

First, the authors will study the long-run statistical characteristics of selected financial assets during the 1895-2011 period. Such an analysis corroborates the fact that, for long holding periods, equities exhibit lower risk than other asset classes. Moreover, they will provide empirical evidence that stock market returns are negatively skewed in the short term and show that this negative skewness vanishes over longer time horizons. Both these characteristics favor the use of a semi-parametric methodology.

Findings

This empirical study led to two major findings. First, the authors noticed that the distribution of stock returns is negatively skewed over short time horizons. Second, they observed that the fat-tailed shape of the returns distribution disappears for time periods longer than five years. Finally, they demonstrated that stock returns exhibit “mean-reversion”. Consequently, the optimization program should not only take into account the non-Gaussian nature of returns in the short run but also incorporate the speed at which volatility “mean reverts” to its long-run mean.

Originality/value

To simulate portfolio allocation, the authors used a Cornish–Fisher Value-at-Risk criterion with the advantage of providing an allocation that is independent of the saver’s preferences parameters. A backtesting analysis including a calculation of replacement rates shows a clear dominance of the “non-Gaussian” strategy because the retirement outcomes under such a strategy would be positively affected.

Details

Review of Accounting and Finance, vol. 15 no. 4
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 25 June 2019

Tomoki Kitamura and Kozo Omori

The purpose of this paper is to theoretically examine the risk-taking decision of corporate defined benefits (DB) plans. The equity holders’ investment problem that is represented…

Abstract

Purpose

The purpose of this paper is to theoretically examine the risk-taking decision of corporate defined benefits (DB) plans. The equity holders’ investment problem that is represented by the position of a vulnerable option is solved.

Design/methodology/approach

The simple traditional contingent claim approach is applied, which considers only the distributions of corporate cash flow, without the model expansions, such as market imperfections, needed to explain the firms’ behavior for DB plans in previous studies.

Findings

The authors find that the optimal solution to the equity holders’ DB investment problem is not an extreme corner solution such as 100 percent investment in equity funds as in the literature. Rather, the solution lies in the middle range, as is commonly observed in real-world economies.

Originality/value

The major value of this study is that it develops a clear mechanism for obtaining an internal solution for the equity holders’ DB investment problem and it provides the understanding that the base for corporate investment behavior for DB plans should incorporate the fact that in some cases the optimal solution is in the middle range. Therefore, the corporate risk-taking behavior of DB plans is harder to identify than the results of the empirical literature have predicted.

Details

Managerial Finance, vol. 45 no. 8
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 3 April 2017

Michael T. Dugan, Elizabeth H. Turner and Clark M. Wheatley

This paper aims to examine the association of accruals and disaggregated pension components with future cash flows and also to investigate whether investors distinguish between…

Abstract

Purpose

This paper aims to examine the association of accruals and disaggregated pension components with future cash flows and also to investigate whether investors distinguish between pension information that is recognized (SFAS 158) versus disclosed (SFAS 132).

Design/methodology/approach

Regression analysis is used with a proxy for expected future cash flows as the dependent variable, and the components of pension disclosures as well as controls for the 2008-2009 financial crisis as the independent variables.

Findings

The results reveal that incorporating disaggregated pension components increases the ability to predict future cash flows, and that investors attach different pricing multiples to the various components in the models. The authors also find that during the 2008-2009 financial crisis, the signs of the coefficients on these components changed. Finally, the results indicate that investors assign more significance to pension accounting information that is recognized, as opposed to disclosed, and that disclosure affects the allocation of pension assets.

Originality/value

The authors provide empirical support for the conjecture posited by Amir and Benartzi (1998) that the prediction of future cash flows will be enhanced by the incorporation of the components of pension assets and liabilities. Importantly from a standard setting perspective, the authors also find evidence that investors assign more significance to pension accounting information that is recognized in the financial statements than to pension information that is disclosed.

Details

Journal of Financial Economic Policy, vol. 9 no. 1
Type: Research Article
ISSN: 1757-6385

Keywords

Article
Publication date: 1 August 1997

Jeffrey A. Manzi and Richard J. Curcio

Pension theory suggests and empirical tests indicate that optimal funding levels for defined benefit plans are determined on the basis of risk, taxes, and capital availability…

Abstract

Pension theory suggests and empirical tests indicate that optimal funding levels for defined benefit plans are determined on the basis of risk, taxes, and capital availability. This study examines whether federal pension and tax legislation enacted in 1986 and 1987 significantly altered the role of risk, taxes, and capital availability as determinants of corporate pension funding policy. Regression tests relating funding levels to these variables were conducted on a sample of pension plans, separately, for each of the reporting years, 1985 (before enactment of the legislation) and 1989 (after enactment of the legislation). Pension risk and tax exposure variables, significant in explaining funding levels in 1985, were not significant in 1989. Pension risk and tax factors under this new regime play a significantly diminished role, if any, in determining funding level policy for defined benefit plans. Evidence is provided that current pension funding is dependent upon the variability of common equity returns, and thus indicate that the pension funding decision is made in the same context as any other capital allocation decision.

Details

Managerial Finance, vol. 23 no. 8
Type: Research Article
ISSN: 0307-4358

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