Pension accounting choice: Managerial response to SEC scrutiny of discount rates.

摘要

This study examines firm response to a September, 1993 letter written by the Chief Accountant of the Securities and Exchange Commission (SEC) recommending that firms reduce their assumed pension discount rates for 1993. Three hypotheses are developed concerning the degree to which a firm decreases its discount rate in light of the SEC recommendation. Based on positive accounting theory and the results of prior pension research, it is posited that differences in compliance across firms will reflect firm differences in the potential for being a target of SEC investigation, leverage, and the adjusted funding ratio. A fourth hypothesis is developed concerning the degree to which firms that comply alter another accounting choice in response to compliance. It is posited that of those firms that comply, those with incentives to report smoothed earnings will smooth the effect of compliance by changing another pension assumption, the salary progression rate.;All four hypotheses are tested via multivariate regression. A sample of 600 firms selected from Compustat is used for tests of hypotheses one through three. As expected, firms with a high potential for being a target of SEC investigation complied to a greater degree to avoid that scrutiny while firms with high leverage complied to a lesser degree to avoid the costs of tightening debt covenants. Contrary to expectations, firms with low adjusted funding ratios complied to a greater degree. This result is interpreted as consistent with the theory of political costs. A smaller sample of 277 firms is used for tests of hypothesis four. As expected, firms that complied with the recommendation decreased their salary progression rates to mitigate the negative effect from compliance.