An Empirical Analysis of Factors Associated with Changes in Pension-Plan Interest-Rate Assumptions

Abstract

This study examines factors motivating managers to adjust pension-expense and pension-plan contributions by altering actuarial-interest-rate assumptions. These changes have implications for firm cash flows, tax costs, and reported accounting numbers. The empirical analysis focuses on identifying the impact these factors have on decisions to change interest-rate assumptions. In addition, the role basic contracting factors play in this decision are examined. The results indicate that managers are likely to increase interest-rate assumptions in response to declines in earnings, increasingly restrictive dividend constraints, and tightening debt covenants. These findings suggest that the motivations for changing rate assumptions differ from managers' motivations for making other discretionary pension adjustments such as terminations, settlements, or other changes in either actuarial assumptions or benefit allocation methods.