Earnings Manipulation and Managerial Investment Decisions: Evidence from Sponsored Pension Plans

Daniel Bergstresser, Mihir A. Desai, Joshua Rauh

NBER Working Paper No. 10543
Issued in June 2004
NBER Program(s):Corporate Finance Program, Labor Studies Program, Asset Pricing Program, Public Economics Program

Managers appear to manipulate firm earnings when they characterize pension assets to capital markets and alter investment decisions to justify, and capitalize on, these manipulations. We construct a measure of the sensitivity of reported earnings to the assumed long-term rate of return on pension assets. Managers are more aggressive with assumed long-term rates of return when their assumptions have a greater impact on reported earnings. Managers also increase assumed rates of return as they prepare to acquire other firms and as they exercise stock options, further confirming the opportunistic nature of these increases. Decisions about assumed rates of return, in turn, influence asset allocation within pension plans. Instrumental variables results suggest that a 25 basis point increase in the assumed rate of return is associated with a 5% increase in equity allocation. Taken together, these results suggest that earnings manipulation arising from managerial motivations influences significant managerial investment decisions.

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Document Object Identifier (DOI): 10.3386/w10543

Published: Bergstresser, Daniel, Mihir Desai and Joshua Rauh. "Earnings Manipulation, Pension Assumptions, And Managerial Investment Decisions," Quarterly Journal of Economics, 2006, v121(1,Feb), 157-195.

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