Corporate Pension Plans as Takeover Deterrents

AbstractWe return to the long-standing question ‘Who owns the assets in a defined benefit pension plan?’ Unlike earlier studies, we condition the market's assessment of implicit property rights on the sponsoring firm's financial health. Valuations of financially strong firms, and those that are strengthening, are more responsive to pension plan funding. For these firms, each extra dollar of net plan assets is valued at between $0.50 and $1.00. In contrast, for weak and weakening firms, valuation effects are statistically indistinguishable from zero. This result is consistent with the higher likelihood that they will renege on their pension obligations.

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The Potential for Inflating Earnings through the Expected Rate of Return on Defined Benefit Pension Plan Assets

Accounting Horizons ◽

10.2308/acch-10115 ◽

2011 ◽

Vol 25 (3) ◽

pp. 443-464 ◽

Cited By ~ 15

Author(s):

Brian Adams ◽

Mary Margaret Frank ◽

Tod Perry

Keyword(s):

Financial Reporting ◽

Asset Allocation ◽

Cumulative Effect ◽

Pension Plan ◽

Pension Plans ◽

Rate Of Return ◽

Defined Benefit ◽

Operating Income ◽

Defined Benefit Pension Plan ◽

Reported Earnings

SYNOPSIS Using a sample of firms over the period of 1991 through 2005, we examine the opportunity that exists for firms to inflate earnings through the expected rate of return (ERR) assumption associated with defined benefit pension plans. The evidence suggests that, on average, the ERR is not overstated relative to several benchmarks, including contemporaneous actual returns, historical cumulative actual returns, and expected future returns based on asset allocation within the pension. We also find that actual changes in the ERR are infrequent and typically have less than a 1 percent impact on annual operating income. We also estimate that a 0.5 percent change (50 bps) in the ERR will result in a cumulative effect on operating income over a five-year period of approximately 0.5 percent or less for the majority of firms. When we examine firms with the highest ERRs or with the greatest opportunity to inflate earnings, again, we find that the ERR is not overstated relative to several benchmarks. Although we do not observe pervasive inflating of reported income through the ERR during our sample period, we do find that for some firms, small increases in ERR can have a material impact on reported earnings. Our results provide evidence related to the pervasiveness, materiality, and impact of overstated earnings through the ERR, which helps regulators assess the costs and benefits of eliminating this discretion in financial reporting.

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Pension Funding and the Actuarial Assumption Concerning Investment Returns

Astin Bulletin ◽

10.2143/ast.33.2.503694 ◽

2003 ◽

Vol 33 (02) ◽

pp. 289-312 ◽

Cited By ~ 3

Author(s):

M. Iqbal Owadally

Keyword(s):

Discount Rate ◽

Asset Allocation ◽

Pension Plan ◽

Pension Plans ◽

Defined Benefit ◽

Return On Assets ◽

Investment Return ◽

Investment Returns ◽

Pension Liabilities

An assumption concerning the long-term rate of return on assets is made by actuaries when they value defined-benefit pension plans. There is a distinction between this assumption and the discount rate used to value pension liabilities, as the value placed on liabilities does not depend on asset allocation in the pension fund. The more conservative the investment return assumption is, the larger planned initial contributions are, and the faster benefits are funded. A conservative investment return assumption, however, also leads to long-term surpluses in the plan, as is shown for two practical actuarial funding methods. Long-term deficits result from an optimistic assumption. Neither outcome is desirable as, in the long term, pension plan assets should be accumulated to meet the pension liabilities valued at a suitable discount rate. A third method is devised that avoids such persistent surpluses and deficits regardless of conservatism or optimism in the assumed investment return.

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Pension Accounting: The Changing Landscape Of Corporate Pension Benefits

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v9i10.5950 ◽

2011 ◽

Vol 9 (10) ◽

pp. 27

Author(s):

Terrye A. Stinson ◽

J. David Ashby ◽

Kimberly M. Shirey

Keyword(s):

Pension Plans ◽

Defined Benefit ◽

Font Size ◽

Pension Accounting ◽

Generally Accepted Accounting Principles ◽

Fortune 100 ◽

Defined Benefit Plans ◽

Corporate Pension ◽

Pension Benefits ◽

Pension Liabilities

This paper discusses recent changes in the generally accepted accounting principles related to accounting for defined benefit pension plans. SFAS 158 imposes new rules related to calculating net pension assets or liabilities and increases the likelihood that companies may report net pension liabilities. This paper looks at a sample of Fortune 100 companies to determine the effect of implementing SFAS 158 on the reported funding status for defined benefit plans, and then tracks the reported pension status from 2005 through 2009. Contrary to expected results, the funding status did not deteriorate following implementation of SFAS 158. The ensuing economic meltdown in 2008 and 2009, however, resulted in more companies reporting pension liabilities.

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Cash balance pension plan conversions and the new economy

Journal of Pension Economics and Finance ◽

10.1017/s1474747204001684 ◽

2004 ◽

Vol 3 (3) ◽

pp. 297-314 ◽

Cited By ~ 21

Author(s):

JULIA LYNN CORONADO ◽

PHILIP C. COPELAND

Keyword(s):

Labor Markets ◽

New Economy ◽

Pension Plan ◽

Defined Benefit ◽

Defined Contribution ◽

Cash Balance ◽

Defined Contribution Plans ◽

Defined Benefit Pension Plan ◽

Pension Liabilities ◽

Defined Benefit Pensions

Many firms that sponsor traditional defined benefit pensions have converted these plans to cash balance plans in the last en years. Cash balance plans in the last ten years combine features of defined benefit and defined contribution plans, and yet their introduction has proven considerably more controversial than has the increasing popularity of defined contribution plans. The goal of this study is to estimate a hierarchy of the influences on the decision of a firm to convert its traditional defined benefit pension plan to a cash balance plan. Our results indicate that cash balance conversions have been undertaken in competitive industries with tight labor markets and thus can be viewed at least in part as a response to better compensate a more mobile labor force. Indeed, many firms appear to increase their pension liabilities through such conversions.

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Pension plan risk-taking: does it matter if the sponsor is publicly-traded?

Journal of Pension Economics and Finance ◽

10.1017/s1474747212000339 ◽

2012 ◽

Vol 12 (2) ◽

pp. 218-249 ◽

Cited By ~ 9

Author(s):

CHRISTINA ATANASOVA ◽

EVAN GATEV

Keyword(s):

Risk Taking ◽

Pension Plan ◽

Pension Plans ◽

Defined Benefit ◽

Publicly Traded ◽

Public And Private ◽

Publicly Traded Firms ◽

Main Determinants ◽

Funded Status ◽

Pension Liabilities

AbstractWe use a large sample of defined benefit (DB) pension plans to document economically significant differences in the risk-taking of plans sponsored by privately-held versus publicly-traded firms. The magnitude and the main determinants of pension plan risk-taking are different for public and private firms. The effect of pension liabilities’ funded status on risk-taking is two and a half times higher for plans with publicly-traded sponsors than for plans with private sponsors. In contrast, changing sponsor contributions has more than four times higher effect on risk-taking for plans with private sponsors. The results suggest that the alignment of incentives for the stakeholders in a pension contract is different for plans sponsored by private versus publicly-traded firms.

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The strategic use of pensions by not-for-profit organizations

Journal of Pension Economics and Finance ◽

10.1017/s1474747218000021 ◽

2018 ◽

Vol 18 (3) ◽

pp. 388-414

Author(s):

THAD DANIEL CALABRESE ◽

ELIZABETH A. M. SEARING

Keyword(s):

Financial Management ◽

Pension Plan ◽

Pension Plans ◽

Defined Benefit ◽

For Profit ◽

Management Objectives ◽

Not For Profit ◽

Net Assets ◽

Earnings Targets ◽

Pension Liabilities

AbstractDefined benefit pension plans are an important and unexplored aspect of not-for-profit compensation, covering between 15% and 21% of the estimated national not-for-profit workforce. Here we consider whether pension contributions and actuarial assumptions are mechanisms for achieving not-for-profit financial management objectives such as smoothing consumption, managing reported net earnings, and minimizing pension liabilities. The empirical results indicate a variety of these behaviors. Not-for-profit pension plan sponsors use accumulated net assets to smooth consumption. Further, not-for-profits manage reported profits downwards when they exceed expectations by increasing pension contributions, but both minimize contributions and liberalize actuarial assumptions when they underperform relative to their desired earnings targets.

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Measuring Pension Liabilities: An Examination Of The Funding Levels Of Defined Benefit Pension Plans

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v11i2.5877 ◽

2011 ◽

Vol 11 (2) ◽

pp. 73 ◽

Cited By ~ 1

Author(s):

Alan I. Blankley ◽

Rober Y. W. Tang

Keyword(s):

Interest Rate ◽

Discount Rate ◽

Pension Plan ◽

Fortune 500 ◽

Pension Plans ◽

Economic Conditions ◽

Defined Benefit ◽

Discount Rates ◽

Chi Square ◽

Pension Liabilities

We examine pension funding measures and interest rate disclosures for 223 firms from the Fortune 500. Three different liability measures are used to develop funding ratios, which indicate sample firms funding condition. We then examine firms discount rate estimates and compare these estimates with their funding levels. Using chi-square tests to examine dependence between rates and funding, we determine whether over (under) funding is simply an artifact of the choice of discount rates or the result of authentic economic conditions surrounding the pension plan.

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Pension Funding and the Actuarial Assumption Concerning Investment Returns

Astin Bulletin ◽

10.1017/s0515036100013477 ◽

2003 ◽

Vol 33 (2) ◽

pp. 289-312 ◽

Cited By ~ 1

Author(s):

M. Iqbal Owadally

Keyword(s):

Discount Rate ◽

Asset Allocation ◽

Pension Plan ◽

Pension Plans ◽

Defined Benefit ◽

Return On Assets ◽

Investment Return ◽

Investment Returns ◽

Pension Liabilities

An assumption concerning the long-term rate of return on assets is made by actuaries when they value defined-benefit pension plans. There is a distinction between this assumption and the discount rate used to value pension liabilities, as the value placed on liabilities does not depend on asset allocation in the pension fund. The more conservative the investment return assumption is, the larger planned initial contributions are, and the faster benefits are funded. A conservative investment return assumption, however, also leads to long-term surpluses in the plan, as is shown for two practical actuarial funding methods. Long-term deficits result from an optimistic assumption. Neither outcome is desirable as, in the long term, pension plan assets should be accumulated to meet the pension liabilities valued at a suitable discount rate. A third method is devised that avoids such persistent surpluses and deficits regardless of conservatism or optimism in the assumed investment return.

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Biased Actuarial Assumptions and SFAS 132R: The Not-for-Profit Response

Journal of Governmental & Nonprofit Accounting ◽

10.2308/jogna-19-013 ◽

2021 ◽

Author(s):

Anubhav Gupta ◽

Thad Calabrese

Keyword(s):

Pension Plan ◽

Financial Statements ◽

Pension Plans ◽

Defined Benefit ◽

Difference In Differences ◽

Accounting Standard ◽

For Profit ◽

Not For Profit ◽

Defined Benefit Pension Plan ◽

Asset Allocations

In 2003, the FASB issued an accounting standard (132R) requiring defined-benefit pension plan sponsors to disclose in the notes the asset allocations of their sponsored pension plans. A motivation for this requirement was to help users evaluate a plan's expected rate of return (ERR) assumption which is supposed to be determined by the allocation of plan assets to risky investments. All else being equal, the higher the assumption, the lower is the pension expense and the higher are reported profits of plan sponsors. We hypothesize that not-for-profits used the ERR to inflate these earnings by reducing pension expenses. Using a dataset of audited financial statements and a difference-in-differences design, we find that not-for-profits significantly decreased their ERRs post-SFAS 132R. The results suggest that opportunistic actuarial assumptions by not-for-profits were reduced following the implementation of SFAS 132R.

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