Management of pension discount rate and financial health

Paula Diane Parker, Nancy J. Swanson and Michael T. Dugan

Journal of Financial Economic Policy, 2016, vol. 8, issue 2, 142-162

Abstract: Purpose - This study aims to examine the unexpected portion of the pension discount rate to determine if the pension discount rate is being used to manage earnings for both financially healthy and financially unhealthy firms as categorized based upon their Altman z-score for bankruptcy. Design/methodology/approach - Regression analysis is conducted with the unexpected portion of the pension discount rate as the dependent variable and various metrics indicating potential firm strengths and weaknesses as the independent variables. Findings - This study finds evidence that suggests managers for both groups of firms are using their choice of discount rate to manage bottom-line earnings. These findings highlight the patterns of various firm choice differences found between the two groups and the magnitude of the differences between the groups. Originality/value - Three streams of literature are considered in this research: earnings management, defined pension plans and z-score bankruptcy. This study extends prior research by examining the unexpected portion of the pension discount rate based on the z-score determination of whether a firm is considered financially healthy or financially unhealthy. Our findings highlight the impact of various firm choice differences found between the two groups of firms.

Keywords: Pension funds; Accounting and auditing; Firm behavior; M4 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:v:8:y:2016:i:2:p:142-162

DOI: 10.1108/JFEP-08-2015-0047

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