Pension discount rate, executive stock-based compensation and investor sentiment
ISSN: 0307-4358
Article publication date: 1 December 2022
Issue publication date: 22 May 2023
Abstract
Purpose
In this paper, the impact of stock-based compensation and further the joint effects of stock-based compensation and investor sentiment on pension discount rate choice is examined.
Design/methodology/approach
The hypotheses is tested using fixed effects models and instrumental variable analysis where pension discount rate is the dependent variable, and stock-based compensation and investor sentiment are our variables of interest.
Findings
It was found that pension discount rate is negatively associated with managers' stock-based compensation. Further analysis indicates that managers with larger stock-based compensation tend to adjust down their pension discount rates in higher (smaller) degree, responding to high (low) investor sentiment.
Practical implications
The findings provide important insights into how managers use pension discount rates to engage in earnings management. Understanding these relationships has implications for interpreting pension numbers reported in the financial statements and designing pension accounting rules that minimize the possibility that managers take advantage of the complexity associated with pension accounting to influence the reported earnings and executive compensation. Moreover, the findings suggest the need for increased attention from boards of directors, auditors and regulators to reported pension liabilities and service costs, especially for firms paying higher proportion of stock-based compensation to managers and during periods of high investor sentiment.
Originality/value
The findings contribute to the extant literature by identifying the joint impacts of stock-based compensation and investor sentiment as incentives for pension discount rate manipulation. The empirical results of this study also have important implications for corporate governance and regulation.
Keywords
Citation
Sun, F. and Wei, X. (2023), "Pension discount rate, executive stock-based compensation and investor sentiment", Managerial Finance, Vol. 49 No. 6, pp. 933-947. https://doi.org/10.1108/MF-01-2022-0023
Publisher
:Emerald Publishing Limited
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