Balance sheet smoothing

Tobias Witter, Thorsten Sellhorn (), Jens Müller and Vicky Kiosse

No 6, Berlin School of Economics Discussion Papers from Berlin School of Economics

Abstract: We investigate how managers smooth volatility in balance sheets, using the pension accounting change IAS 19R as a shock to balance sheet volatility. This shock increases pension plans’ funding transparency, which is the source of volatility, without targeting actual plan funding. We find that managers adjust funding levels, pension asset allocation and assumptions to mitigate volatility at this source, but also plan settlements increase drastically. The volatility of accruals decreases, whereas volatility of discretionary real decisions increases pointing to managerial decisions to alleviate volatility in balance sheets. The exposure to balance sheet volatility and the relative net costs of related smoothing are cross-sectional predictors of smoothing activities. Overall, we provide evidence consistent with a vast body of pension accounting literature mentioning but not explicitly investigating the transmission of pension plan volatility on firms’ balance sheets. Our findings link this literature with studies on balance sheet management and provide a new angle on the effects of a transparency mandate in (pension) accounting on managerial decision-making.

Keywords: balance sheet volatility; balance sheet smoothing; real effects; defined benefit plans; IAS 19R (search for similar items in EconPapers)
JEL-codes: G11 G31 G32 M41 (search for similar items in EconPapers)
Pages: 100 pages
Date: 2022-12-13
New Economics Papers: this item is included in nep-acc
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Persistent link: https://EconPapers.repec.org/RePEc:bdp:dpaper:0006

DOI: 10.48462/opus4-4673

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