'AsianFA' Financial Flexibility Beyond Earnings Management: Do Pension Accounting Assumptions Create Shareholder Values?

Noriyoshi Yanase    Shingo Goto, Noriyoshi Yanase
01 Apr 2018
Categories: Accounting, Fundamental Analysis, Financial Analysis, Investment Management, Financial Policy, Equity Investments, Corporate Finance

Country or region: Japan

Summary:
While firms often use pension return assumptions to manage earnings, they may also use high return assumptions to signal lower pension contributions to increase internal cash flows available for profitable investments. Benefits of such internal funding can overweigh forgone tax benefits. Our cross-sectional evidence suggests that pension return assumptions can exert real effects beyond earnings management, as they predict significant increases in operating cash flows, fixed capital investments, and R&D expenditures. The stock market places significant values on pension return assumptions beyond the valuation of management forecasts of earnings, especially among firms with low profitability or large pension underfunding.
Date of original publication:

04/01/2018


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