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Regulatory Oversight and Tradeoffs in Earnings Management: Evidence from Pension Accounting, Review of Accounting Studies


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.




James Naughton

Date Published



Naughton, James. 2019. Regulatory Oversight and Tradeoffs in Earnings Management: Evidence from Pension Accounting. Review of Accounting Studies.


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