The economic consequences of accounting standards: Evidence from risk-taking in pension plans

Divya Anantharaman, Elizabeth C. Chuk

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

Experts have long conjectured that pension accounting rules, by which pension expense depends on a managerial estimate that is directly tied to the riskiness of plan assets (i.e., the expected rate of return, or ERR, on plan assets), encourage risk-taking with pension investments. The recent passage of IAS 19, Employee Benefits (Revised) (hereafter, IAS 19R) eliminates the ERR and replaces it with a managerial estimate unrelated to plan asset riskiness (the discount rate). We demonstrate that a sample of Canadian firms affected by IAS 19R reduces risktaking in pension investments post-IAS 19R, compared to a control sample of U.S. firms unaffected by IAS 19R. Therefore, removing firms' ability to recognize immediately in net income the expected higher returns from risk-taking (via a higher ERR) reduces their propensity for that risk-taking-providing some of the first empirical evidence on the economic consequences of eliminating the ERR-based pension accounting model.

Original languageEnglish (US)
Pages (from-to)23-51
Number of pages29
JournalAccounting Review
Volume93
Issue number4
DOIs
StatePublished - Jul 2018

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Keywords

  • Expected Rates Of Return
  • IAS 19R.
  • Pension Accounting
  • Pension Asset Allocation

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