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theses

In this study, I investigate managers’ opportunistic behavior and its consequences by using pension accounting. Literature on pension accounting documents that the characteristics of pension accounting, such as its long-term nature, complexity, and roughly regulated footnote disclosure, offer exercisable discretion over accounting numbers. I conjecture that effective internal controls and transparent disclosures constrain managers’ opportunistic behavior. The first essay examines the effect of internal control weaknesses (ICWs) on managers’ choice of pension assumptions. I hypothesize that firms with ICWs are better able to opportunistically set pension assumptions, such as the expected rate of return (ERR) and the discount rate (DR), which in turn help to report higher earnings or healthier balance sheets. First, I find that firms tend to report higher ERR and DR when they receive an adverse audit opinion on internal control. In addition, I find that the firms facing more incentives to manage the funding status of pension plan are likely to choose higher DR in response to the incentives. Next, I find that firms with ICWs are more likely to adjust their biased ERR when they receive an unqualified audit opinion on internal control. Finally, I find that market returns are significantly negative for the firms assuming higher ERR in the 3-day window around the disclosure of material weaknesses if the firms’ earnings are sensitive to the changed ERR. The second essay examines whether ERR manipulation is related to disclosure of pension asset allocation. FAS 132R(1), which requires firms to disaggregate the detailed categories of pension asset allocation, provides a natural experiment for studying the effect of enhanced transparency on firm behavior. I posit that firms discretionarily assume higher ERR by using the opaque disclosure under the old standard, and adjust biased ERR downward under the greater reporting transparency. The hand-collected data allow me to identify the extent of disclosure variation under the two different reporting regimes. I measure the variation of disclosure with self-constructed disclosure scores. I find that opaque disclosure of plan asset allocation is associated with ERR management. Specifically, for firms with poor disclosure, mandated transparency in pension asset allocation plays a vital role in reducing the ERR management. I also find that ERR management is facilitated by the opaque disclosure even under the new reporting regime. Particularly, I find that firms tend to assume higher ERR through the opaque disclosure when they disaggregate the indirectly invested funds with no description of underlying asset classes.

ETD_6452

Ph.D.

Includes bibliographical references

Includes vita

by Seokyoun Hwang

doi:10.7282/T31C1ZR1

ETD doctoral

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