The Economic Consequences of Accounting Standards: Evidence from Risk-Taking in Pension Plans
Anantharaman, Divya, Chuk, Elizabeth C.
The Accounting Review · 2018 · Volume 93 · Issue 4
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 risk-taking 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.
Keywords
pension accounting, expected rates of return, pension asset allocation, IAS 19R
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