Accounting Implications for Managed Earnings via Pension Expense

Abstract

Recent earnings management studies provide evidence firms manage reported earnings to achieve certain capital market reporting objectives. This study extends earlier research by focusing directly on pension expense rather than focusing on the effect of individual pension rate assumptions. This study uses a $.10 screening technique in selecting the sample for testing. Based on a proxy for premanaged earnings, firms hypothetically missing their capital market benchmark earnings (i.e. prior year earnings target) are predicted and shown to reduce their actual pension expense to increase actual reported earnings; whereas firms hypothetically beating their capital market benchmark earnings (i.e. prior year earnings target) are predicted and shown to increase their actual pension expense to reduce their actual reported earnings. Results suggest firms use pension expense to actively and predictably manage actual reported earnings.