Economic Consequence of Pension Accounting: Evidence from the adoption of IAS19R on Pension Asset Allocation

Authors: Vu, T.

Conference: XII International Accounting Research Symposium

Dates: 27 June-1 July 2016


Pension Accounting have been long believed as a determinant factor for firm’s investment strategy in their define pension benefit plan (Zion and Carcache 2003, Gold 2005). In 2011, International Accounting Standard No. 19 (IAS19R)-Employee Benefits Revised was published, marks a fundamental change of pension reporting in Income Statement. That is, IAS19R removes the incentive for sponsor firms to over engage their pension plan in high risky securities investment since the benefit of this strategy would not be recognized in sponsor firms’ net income. Specifically, sponsor firms must utilize the “discount rate” - equal to the yield on high quality corporate bonds - to calculate and report the return of pension asset regardless of how asset have been allocated in pension portfolio. Therefore, if it is the case that boosting net income through pension investment is one of the significant driver factors for pension plan asset allocation, then the adoption of IAS19R would discourage the sponsor firms and reduce the investment of high risk assets, such as equities in pension portfolio. This research examines this economic consequence by exploiting the difference-in-differences research design with propensity score matching techniques. The result suggests that UK sponsor firms affected by IAS19R reduce their risk-taking in pension investments post-IAS19R, both overtime and compared to a control sample of unaffected US firms (matched by propensity score matching). This result was also robustly tested by selecting different examining window lengths and different events. The outcome of the Sensitivity Analysis also suggests that UK sponsors firms tried to avoid the expensive liquidity cost of the asset re-allocation by changing their asset allocation in pension plan gradually during the period surrounding the publication and adoption of IAS19R. Finally, among these Tests, I also find a positive relationship between the equity investment level with firms’ leverage and firms ‘cash flow risk. It supports the “risk-shifting” hypotheses that have been debated in previous literature (Jensen and Meckling, 1976; Myers, 1977; Leland, 1998 and Cocco & Volpin, 2007).

Keywords: Pension Accounting, Pension Asset Allocation, IAS19

Source: Manual