Disclosure of Pension Asset Allocation and Expected Rate of Return Management

Abstract

This study examines whether expected rate of return (ERR) manipulation is related to disclosure of pension asset allocation. FAS 132R(1), which requires firms to disaggregate the detailed categories of pension asset allocation, provides a natural experiment for studying the effect of enhanced transparency on firm behavior. We posit that firms discretionarily assume higher ERR by using the opaque disclosure under the old standard, and adjust biased ERR downward under the greater reporting transparency. The hand-collected data allow us to identify the extent of disclosure variation under the two different reporting regimes. We find that opaque disclosure of plan asset allocation is associated with ERR management. Specifically, for firms with poor disclosure, mandated transparency in pension asset allocation plays a vital role in reducing the ERR management. We also find that ERR management is facilitated by the opaque disclosure even under the new reporting regime. Particularly, we find that firms tend to assume higher ERR through the opaque disclosure when they disaggregate the indirectly invested funds with no description of underlying asset classes.