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Pension discount rate and investor sentiment

Pension discount rate and investor sentiment The purpose of this paper is to examine how investor sentiment, proxied by Michigan consumer confidence index, affects the choice of defined benefit pension plan discount rates.Design/methodology/approachThe authors use multivariate analysis to test our hypotheses. The dependent variable is defined pension plan discount rate and the testing variables are investor sentiment and a dummy variable representing underfunded status.FindingsThe authors find a negative and significant relation between investor sentiment and pension plan discount rate. During high (low) sentiment periods, pension discount rate tends to be adjusted downward (upward) discretionarily. Further analysis indicates the relationship between pension discount rate and investor sentiment is more pronounced for firms with underfunded pension plans. The results can be explained by limited attention effects, capital budgeting strategy and earning smoothing.Practical implicationsThe empirical results of this study have important implications for corporate governance and regulation. Specifically, the results suggest the need for increased attention from boards of directors, auditors and regulators to reported pension liabilities, especially during periods of high investor sentiment when pension plan sponsors are more likely to adjust down pension discount rate and accordingly to increase pension liabilities.Originality/valueThe paper contributes to the extant literature by identifying investor sentiment as a new incentive of pension discount rate manipulation. The empirical results of this study also have important implications for corporate governance and regulation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Pension discount rate and investor sentiment

Sun, Fang; Wei, Xiangjing
Managerial Finance , Volume 45 (6): 12 – May 23, 2019
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References (57)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0307-4358
DOI
10.1108/mf-05-2018-0209
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to examine how investor sentiment, proxied by Michigan consumer confidence index, affects the choice of defined benefit pension plan discount rates.Design/methodology/approachThe authors use multivariate analysis to test our hypotheses. The dependent variable is defined pension plan discount rate and the testing variables are investor sentiment and a dummy variable representing underfunded status.FindingsThe authors find a negative and significant relation between investor sentiment and pension plan discount rate. During high (low) sentiment periods, pension discount rate tends to be adjusted downward (upward) discretionarily. Further analysis indicates the relationship between pension discount rate and investor sentiment is more pronounced for firms with underfunded pension plans. The results can be explained by limited attention effects, capital budgeting strategy and earning smoothing.Practical implicationsThe empirical results of this study have important implications for corporate governance and regulation. Specifically, the results suggest the need for increased attention from boards of directors, auditors and regulators to reported pension liabilities, especially during periods of high investor sentiment when pension plan sponsors are more likely to adjust down pension discount rate and accordingly to increase pension liabilities.Originality/valueThe paper contributes to the extant literature by identifying investor sentiment as a new incentive of pension discount rate manipulation. The empirical results of this study also have important implications for corporate governance and regulation.

Journal

Managerial Finance – Emerald Publishing

Published: May 23, 2019

Keywords: Investor sentiment; Discount rate; Pension

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