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Fair Value Pension Accounting, Corporate Risk and Investment

By Iain Clacher

Abstract

The purpose of this research is to analyse the impact of defined benefit pension schemes on UK corporations. In doing so the analysis contributes to a number of existing literatures in Accounting and Finance. First the thesis contributes to the accounting literature by analysing the adoption of fair value pension accounting. Second, I contribute to the extant bterature on market efficiency and firm risk by analysing whether measures of systematic risk, financial risk and operational risk reflect the underlying risk of the pension scheme. Finally, the thesis contributes to the literature on internal capital markets and investment decisions through analysing the relationship between pension contributions, capital expenditures and firm profitability.\ud \ud In analysing how fair value accounting of pensions has been implemented I consider the extent to which managers exercise discretion under fair value accounting and the value relevance of these disclosures. My main findings can be summarised as follows. First, despite little variation in the underlying economic inputs, differences in\ud stated assumptions across companies, auditors and actuaries are significant. Further, I find that the adoption of fair value pension accounting provides value relevant\ud disclosure and so share prices reflect the value of the underlying pension scheme. However, managers display considerable variation in conservatism when implementing\ud fair value accounting and this variation is related to scheme-specific characteristics, such as asset allocation and pension scheme solvency. Consequently, the chapter argues that the observed inconsistency in reporting across firms brings into question the efficacy of fair value accounting for assessing corporate risk.\ud \ud The second research area considers the relationship between measures of systematic risk, firm distress and pension risks. My results show that systematic, default, financial and operational risks reflect the underlying risk of the pension scheme. Further, pension scheme asset allocation is consistent with active pension risk management. Managers therefore choose to undertake risk management of pension\ud risks as opposed to risk-shifting through asset substitution.\ud \ud The final research area investigates the impact of pension contributions on firm capital expenditure and profitability. Pension contributions are shown to be a function of the size of the pension scheme, pension asset allocation and scheme funding. My results also suggest that firms who pay the highest contributions have lower capital\ud expenditure and higher profitability. Lastly, I find that contributions are unrelated to the level of dividends paid or to fixed asset disposals

Publisher: Leeds University Business School
Year: 2008
OAI identifier: oai:etheses.whiterose.ac.uk:629

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