Title: Mountain or Molehill? The Pervasiveness of Overstated Earnings Through the Expected Rate of Return on Defined Benefit Pension Plan Assets
Abstract: Using a sample of firms over the period of 1991 through 2005, we examine the expected rate of return (ERR) assumption associated with defined benefit pension plans. The evidence suggests that contrary to suggestions in the business press, the ERR is not overstated relative to several benchmarks including contemporaneous actual returns, historical cumulative actual returns and expected future returns based on asset allocation within the pension. We also find that changes in the ERR are infrequent, typically have less than a 1% impact on operating income and are positively related to differences between estimated and actual ERRs. When we examine firms with the highest ERRs or with the most opportunity to inflate earnings, we find they are no more likely to boost earnings through the ERR than other firms. We conclude that the evidence suggests overstated earnings through the ERR is not pervasive or material, which helps regulators assess the costs and benefits of eliminating this discretion in financial reporting.
Publication Year: 2008
Publication Date: 2008-01-01
Language: en
Type: article
Indexed In: ['crossref']
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Cited By Count: 1
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