Regulatory oversight and trade-offs in earnings management: evidence from pension accounting

  • James P. NaughtonEmail author


I develop approaches that quantify the use of discretion for the three main assumptions used for the financial reporting of defined benefit pension obligations: the expected return, the discount rate, and the compensation rate. I then apply these approaches to two regulatory events that affected a different subset of these three assumptions. Across both settings, my analyses indicate that firms reduced discretion in response to regulatory scrutiny—but only in those assumptions targeted by the regulatory event. In contrast, I find that firms increased the use of discretion in the other assumptions, consistent with a substitution effect. I also find that the use of discretion in the discount rate and compensation rate are approximately two to three times more effective at changing reported earnings than the use of discretion in the expected return. Collectively, my analyses highlight the interdependence of the three main pension assumptions and the relative weakness of the expected return as an earnings management tool.


Pension accounting Disclosure Earnings management SFAS132 Regulatory oversight 

JEL classification

G3 J32 M41 M43 M44 M45 



I appreciate helpful suggestions and comments from Craig Chapman, Joe Comprix, Dain Donelson, Joseph Gerakos (discussant), Wayne Guay, Paul Healy, Bob Kaplan, Michael Kimbrough, Asis Martinez-Jerez, Dave Maber, Greg Miller, Krishna Palepu, Eddie Riedl, Eugene Soltes, Beverly Walther, Clare Wang, Joe Weber, Gui Woolston, and seminar participants at Harvard, Northwestern, Columbia, NYU, and Duke. I would also like to thank Brigitte Madrian, Chris Allen, Blake Bowler and two anonymous consulting firms for providing data and research assistance. I gratefully acknowledge funding from the Deloitte Foundation.


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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Kellogg School of ManagementNorthwestern UniversityEvanstonUSA

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