Discount rates and pension liabilities.
Item
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Title
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Discount rates and pension liabilities.
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Identifier
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AAI9618044
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identifier
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9618044
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Creator
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Bozewicz, Jane.
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Contributor
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Adviser: Harry Z. Davis
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Date
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1996
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Language
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English
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Publisher
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City University of New York.
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Subject
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Business Administration, Accounting
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Abstract
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Financial statement disclosures concerning defined benefit pension plans are among the most complex mandated by the Financial Accounting Standards Board. Accounting for these pension liabilities involves a series of complex estimations. One of the most critical elements is the discount rate used to convert the projected stream of benefit payments to a present value. Standard No. 87: Employers' Accounting for Pensions describes the specific factors the discount rate should reflect, suggests several benchmarks, and requires disclosure of the rate. However, managers have discretion in the final selection of the discount rate.;Differences in the time horizon for benefit payout are the only factors which should theoretically produce differences in discount rate choice, suggesting that little variation should be observed in practice. However, discount rates during the period from 1986 through 1992 varied from roughly 5% to 11%, which can induce substantial differences in the reported liabilities.;The central research questions in this dissertation focus on investor use of the discount rate in pricing securities and the factors which influence managers in their choice of the discount rate.;The results of the analysis support the conclusion that market valuation of the pension liability reflects the discount rate as well as the reported liability. Market prices adjust for difference in discount rate and weight liabilities accordingly.;The factors hypothesized to influence rate selection were found to be significantly associated with the discount rate choice. The strongest influence was exerted by the pension plan's funded status: managers select discount rates that minimize both overfunding and underfunding. Unionization rates have a negative association with discount rate choice, consistent with a monitoring role for unions, bonding effects, and a desire of unionized firms to exaggerate the cost of providing pension benefits. The firm's debt-equity ratio had a significant positive association with discount rate, consistent with the debt-covenant hypothesis commonly invoked to explain accounting choice. Finally, firms with poor pension fund asset performance (relative to expectations) were found to use higher discount rates. This was consistent with the use of the discount rate to minimize reported underfunding.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
