The Opportunistic Use of Pension Assumptions and Pension Cost Reporting

Abstract

We examine whether firms adopt more aggressive pension assumptions to increase the probability of reporting pension income and how the economic conditions affect firms’ behavior in adopting pension assumption. Our study shows that firms are conservative in adopting the ERR but alter their behavior and use optimistic ERR assumptions when a recession affects profitability. In addition, we find that firms reporting pension income adopt more aggressive ERR than firms reporting pension expense. This behavior is exacerbated during economic hardship. We also find that companies reporting pension income have higher leverage but lower return on assets than firms reporting pension expense.