Essays on pensions
Date: 6 January 2020
University of Exeter
Doctor of Philosophy in Accountancy
This thesis consists of two self-contained empirical chapters on defined benefit pension plans (DB hereinafter) in the European Union (EU hereinafter) and the United States (U.S. hereinafter). These chapters examine earnings management incentives ahead of major corporate events, changes in pension accounting standards and unemployment ...
This thesis consists of two self-contained empirical chapters on defined benefit pension plans (DB hereinafter) in the European Union (EU hereinafter) and the United States (U.S. hereinafter). These chapters examine earnings management incentives ahead of major corporate events, changes in pension accounting standards and unemployment risk’s role on firm’s pension decisions. The first chapter provides a discussion on regulatory background and reviews the literature on pension actuarial assumptions in EU and the U.S. and pension investments. The second chapter studies the pension actuarial assumptions’ role in EU firms’ earnings management behaviour ahead of major corporate events such as mergers and acquisitions (M&As hereinafter), initial public offerings (IPOs hereinafter), and seasoned equity offerings (SEOs hereinafter). Prior literature has found that managers tend to manage earnings upward before such events in order to boost stock prices and maximise proceeds (Erickson & Wang, 1999). For example, a positive relationship has been documented between the expected rate of return (ERR hereinafter) and reported earnings (Asthana, 2008). The second chapter also examines the impact of IAS 19 revised Employee Benefits (IAS 19R hereinafter) on EU firms’ earnings management behaviour ahead of major corporate events such as M&As, IPOs, and SEOs. The recent introduction of IAS 19R marks a fundamental shift in pension accounting because it eliminates the use of the ERR on plan assets when computing pension expenses. It has been replaced by the discount rate, which was already being used under IAS 19 to compute the present value of pension obligations and interest costs. Given academic and anecdotal evidence that managers manage 2 the ERR (Bergstresser, Desai & Rauh 2006; Chuk, 2013; Picconi, 2006), this change will alter their ability to manage earnings. To investigate the above, I study public firms in the EU involved in M&As, IPOs, and SEOs between 2005 and 2016. The results show that, before the adoption of IAS 19R, firms generally manage their expected rates of return upward before all types of major corporate events. However, the results provide evidence that firms manage the discount rate after the adoption of IAS 19R. I also explore two potential alternative tools for managing reported numbers both before and after the implementation of IAS 19R: discretionary accruals management and real earnings management. The results are consistent with the notion that firms use real earnings management to a greater extent after the adoption of IAS 19R. The third chapter studies the effect of unemployment risks on pension investment and other pension-related decisions. Previous literature suggests that firms tend to take more risk with respect to their corporate financial policies after unemployment risk decreases (Agrawal & Matsa, 2013). Pension investment decisions are a major part of firms’ overall financial policies. I examine the changes in state unemployment insurance (UI hereinafter) laws as a source of exogenous variation in the costs borne by employees during unemployment. I use fixed effects and difference-in-differences (DiD hereinafter) methods for a matched sample of treatment and control firms. I find evidence that firms undertake higher pension investment risk by investing more heavily in equities after unemployment risk decreases. According to Dou, Khan and Zou (2016), firm’s earnings management behaviour can be reduced after unemployment risk decreases. In subsequent tests, I examine whether unemployment risk affects firm’s earnings management 3 behaviour using pension actuarial assumptions. The results show that firms manage pension actuarial assumptions such as the ERR to a lesser extent after unemployment benefits increase. Furthermore, I examine the impact of unemployment risk on firms’ pension plan freeze decisions. When firms freeze their DB plans, they typically set up defined contribution plans (DC hereinafter). Employees bear higher risks under DC than DB plans. Thus, unemployment risk will increase if firms freeze their DB plans. I find that the probability of a pension DB plan freeze increases after unemployment benefits increase, which is consistent with expectations.
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