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The impact of duration on management's discount rate choice

Authors
Journal
Research in Accounting Regulation
1052-0457
Publisher
Elsevier
Identifiers
DOI: 10.1016/j.racreg.2014.09.003
Keywords
  • Pensions
  • Interest Rates
  • Duration Disclosure
Disciplines
  • Economics

Abstract

Abstract Previous research finds that firms increase their assumed discount rates to minimize their reported pension benefit obligation. This paper demonstrates that firms whose pension plans have short durations lower their discount rates (rather than increase them), since a lower discount rate decreases their pension expense. These results are especially relevant in the present climate of low interest rates and more firms freezing their defined benefit pension plans, thereby shortening the duration of their obligations. Given its importance in shaping management motivation we believe that firms should be required to disclose the duration of their future obligations.

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