Earnings management strategy of pension plan changing firms

Abstract

This study investigates the earnings management strategy of defined benefit pension plan changing firms. I provide the evidence that managers engage in cash conservation activities and real earnings management in response to the changes in funding status and pension income through the manipulation of pension assumptions before and after pension freezing. These results suggest that earnings management through pension assumptions affects the normal operations of the firm through real activities during the defined benefit plan pension freezing. I also provide evidence that pension termination firms exhibit a lower level of discretionary accruals after the termination, suggesting the downsizing of a pension plan serves as a tool for earnings management. These findings provide evidence that firms alter earnings management strategy and engage in cash saving activities in response to the changes in pension assumptions during the pension freezing and the changes in the pension structure during the pension termination.