Accounting Standards and Pension Investment Decisions

Abstract

This study analyzes the ‘real’ effects of accounting standards in the context of defined benefit pension plans. Specifically, we examine IAS 19R, which increases expected pension-induced equity volatility by eliminating the so-called ‘corridor method’ of accounting for actuarial gains and losses. Supported by interview evidence, we predict that IAS 19R leads firms to reconsider their pension investment decisions. Using matched samples of treatment and control firms, results from difference-in-differences tests indicate that firms affected by IAS 19R adoption significantly shift their pension assets from equities into bonds, relative to control firms. This effect is attenuated in the cross-section for firms with larger and better funded pension plans. Supplementary analyses suggest that this shift in pension investment is mainly due to IAS 19R’s changes in the accounting for actuarial gains and losses (the ‘OCI method’). These results are robust to a number of sensitivity tests, although endogeneity concerns cannot be fully ruled out. Our study informs accounting standard setters of potential shifts in firms’ real economic activities due to concerns about pension-induced equity volatility.