Do Corporations Manipulate Earnings to Meet or Beat Analysts’ Expectations? Evidence from Pension Assumption Changes. Yul W. Lee and T. Jeffrey Zhang University of Rhode Island AAA Conference August 5, 2008.
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Do Corporations Manipulate Earnings to Meet or Beat Analysts’ Expectations? Evidence from Pension Assumption Changes
Yul W. Lee and T. Jeffrey Zhang
University of Rhode Island
August 5, 2008
“Increasingly, I have become concerned that the motivation to meet Wall Street earnings expectations may be overriding common sense business practices.”
– The “Numbers Game”, by Arthur Levitt, former Chairman of SEC, a speech at NYU Centers for Law and Business on September 28, 1998
Service cost (PV of pension benefits earned by employee over the last year)+ Interest cost (Growth in PBO over the last year due to the passage of time)+Other costs (i.e., actuarial gain and pension amendment)
–Expected returns on plan assets (=ERR x FVPA)=Net periodic pension cost (NPPC) (Reported on Income Statement)
Pseudo-EPS: Eliminating the effect of changes in the ERR from the I/B/E/S
actual annual EPS
Use a dummy variable, pseudoMiss to indicate whether the pseudo-EPS
misses or beats analysts’ expectations:
pseudoMiss = 1 if MissAmt < 0 (pseudo-EPS < analysts’ median forecasted EPS)
pseudoMiss = 0 if MissAmt >= 0 (pseudo-EPS >=analysts’ median forecasted EPS)