Topics I’m working on right now

PENSIONS

My primary research interest is defined-benefit pensions. I am interested both in pension accounting and pension finance. Most of my work has been on corporate pensions, but I have started to work on governmental pensions as well. Here are some projects I am working on currently.

The Impact of Governmental Accounting Standards on Public-Sector Pension Funding, with Elizabeth Chuk.

Available on SSRN here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3438074

The funding policy for defined benefit pension plans covering government employees represents an important decision for government entities sponsoring those plans. In recent years, a number of state and local governments have experienced extreme funding shortfalls (e.g., New Jersey, Illinois, and Detroit), raising concerns about whether government entities are contributing enough to their pensions. Governmental Accounting Standards Board Statements Number 67/68 (hereafter, “GASB 67/68”) fundamentally alter the financial reporting of pension liabilities, by (i) requiring pension liabilities to be estimated using a potentially lower discount rate (which increases estimated liabilities and any funding deficits), and (ii) mandating recognition of funding deficits (surpluses), which were previously only disclosed in footnotes, as a liability (asset) on governmental balance sheets. Although GASB 67/68 only changes financial reporting requirements and acknowledges specifically that funding decisions are outside its scope, we find, for a sample of 100 large state-administered plans, that governments increase pension contributions upon applying GASB 67/68, over time as well as compared to corporate pension plans as a control group in difference-in-differences tests. In cross-sectional tests within governmental plans, the funding response is primarily observed from governments expecting a larger dollar impact to applying GASB 67/68, and from governments facing more adverse economic or political consequences from financial statement recognition. Government plans that increase funding are also more likely to have passed benefit cuts, suggesting that taxpayers and public employees share the costs. Overall, these responses suggest that governmental entities are willing to take actions with cash flow consequences to avoid recognizing large liabilities on-balance sheet; purely accounting changes, therefore, can have “real” effects on governmental pension policy.

Location, location, location! Real effects from the mandated removal of pension expected return from operating income, with Elizabeth Chuk and Saipriya Kamath.

Available on SSRN here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3789464

An earlier version of this paper was circulated as "Does income statement placement matter to firms? Evidence from the mandated removal of pension cost components from operating income"

The accounting for defined-benefit (DB) pension expense in U.S. GAAP involves offsetting pension costs against an expected (rather than actual) return on pension assets. Pensions commentators argue that this expensing model tilts pension portfolios towards riskier assets – as sponsoring firms can benefit from assuming higher expected rates of return on riskier assets (which reduce pension expense and boost reported income), without bearing the cost of higher volatility in reported income. We examine a recent regulatory change in U.S. GAAP, which mandates the relocation of the expected return on pension assets from “above the line” of to “below the line” of operating income. Consistent with this change reducing the financial reporting incentives for risk-taking, we predict and find that a sample of U.S. firms subject to this mandate reduces risk-taking in pension assets following the change, relative to a control sample of Canadian firms not subject to the change. In cross-sectional tests, we find that the reduction in risk-taking is more pronounced in (1) firms where the financial reporting incentives for risk-taking were stronger in the pre-period, and in (2) firms where the regulatory change particularly reduced those benefits. Our findings imply that managers are willing to undertake real actions (i.e., invest in riskier assets) to report favorable operating income, and that these incentives are incremental to the incentives to report favorable net income. They also provide evidence that financial reporting incentives serve as a driver of pension asset allocation decisions.

So similar, yet so different: Comparing the US GAAP and IFRS experience at eliciting greater transparency on pension asset disclosures, with Elizabeth Chuk and Tonni Shijun Xia.

Available on SSRN here: https://ssrn.com/abstract=3646842

We examine whether regulatory mandates intended to improve disclosure can lead to greater transparency in the absence of a change in preparer incentives to obfuscate that disclosure. We exploit a sequence of two otherwise similar regulatory changes, one under US GAAP and the other under IFRS, which have one key difference—while both changes mandate improvements to the disclosure of pension asset allocation, only the latter removes preparer incentives to disclose opaquely (by eliminating a key reporting assumption—the expected rate of return on pension assets or ERR, which can be more effectively manipulated if asset allocation remains opaque). We construct two difference-in-difference research designs to examine and compare disclosure outcomes for both changes. We find that the IFRS disclosure standard is effective at improving pension asset transparency as intended, whereas the US standard—which only mandates better disclosure while leaving unchanged preparers’ incentives to disclose or obfuscate—is not as effective at improving pension asset transparency. Further tests isolate the IFRS improvement to firms likely to have inflated their ERRs before the change. Overall, our study highlights the potential for standard-setters to learn from each other, by comparing and contrasting their regulatory experience on a specific accounting topic with clearly identifiable incentives.

The Tax Cut and Jobs Act (2017) as a driver of pension derisking: A comprehensive examination, with Saipriya Kamath and Shengnan Li.

Available on SSRN here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3790854

Corporate defined-benefit (DB) pension sponsors in the US are increasingly on a path of “derisking” – by moving pension assets away from equities and towards fixed-income securities that better match the obligations, or by transferring obligations off their balance sheets entirely, via settlements with insurance companies or lump-sum payouts to beneficiaries. In this study, we examine whether the Tax Cut and Jobs Act of 2017 (“TCJA”) served as a driver of pension derisking. Examining behavior in the window between the TCJA’s announcement and its lower tax rate going into effect, we document that sponsors with stronger incentives to derisk their pensions tend to contribute more into their plans in that window, while deductions can still be taken at the higher tax rate – specifically, sponsors expecting large and uncertain contribution requirements for pensions in the future, facing high regulatory costs to maintaining plans, and with competing demands on cash flows. Examining behavior after the TCJA goes into effect, we document that the firms with the largest TCJA-triggered contributions also engage in more derisking subsequently, both by shifting asset allocations and by transferring obligations to other parties. In sum, our findings point to the TCJA having acted as a trigger for what could be a fundamental reorganization of the DB pension landscape in the US.

My published works on pensions include the following:

Does social responsibility begin at home? The relation between firms' pension policies and corporate social responsibility (CSR) activity. With Feng Gao and Hariom Manchiraju. Forthcoming in Review of Accounting Studies. Available on SSRN here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3871192

Contrasting the information demands of equity- and debt-holders: Evidence from pension liabilities. With Darren Henderson. Journal of Accounting and Economics 71 (2-3). Available on SSRN here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3020879

The economic consequences of accounting standards: Evidence from risk-taking in pension plans. With Elizabeth Chuk. The Accounting Review 93(4). Available on SSRN here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2629277

The role of specialists in financial reporting: Evidence from pension accounting. Solo-authored. Review of Accounting Studies 22(3).

Managerial risk-taking incentives and corporate pension policy. With Yong Gyu Lee. Journal of Financial Economics 111. Available on SSRN here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2288948

Inside debt and the design of corporate debt contracts. With Vivian Fang and Guojin Gong. Management Science 60(5). Available on SSRN here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1697855

Executive debt-like compensation. With Vivian Fang. Corporate Governance: Recent Developments and New Trends (book chapter).

INFORMATION INTERMEDIARIES IN CAPITAL MARKETS

I have worked on understanding the incentives of various information intermediaries in capital markets, importantly equity analysts and auditors. A list of published works in these areas follows. My interest in actuaries ("The role of specialists in financial reporting..." in Review of Accounting Studies) also arose from these explorations.

Auditor experience with accelerated filers and SOX 404(b) audit quality. With Nader Wans. The Accounting Review 94(4).

State liability regimes in the US and auditor reporting. With Jeffrey Pittman and Nader Wans. The Accounting Review 91(6). Available on SSRN here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2372993

Comparing self-regulation and statutory regulation: Evidence from the accounting profession. Solo-authored. Accounting, Organizations, and Society 37. Available on SSRN here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1980311

Cover Me: Managers' responses to changes in analyst coverage in the Post-Reg FD period. With Yuan Zhang. The Accounting Review 86(6). Available on SSRN here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1837126

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE ASPECTS OF CORPORATE PERFORMANCE

I have begun to work in the areas of corporate social responsibility (CSR) and environmental, social, and governance (ESG) aspects of corporate performance. I am specifically interested in assessing the quality of ESG disclosures.

Is a Picture Worth a Thousand Words? An Examination of Image Usage in CSR Reports, with Disen Huang and Keyi Zhao. Available on SSRN here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3722228

Prior research identifies images as a tool for corporate impression management. We collect a novel dataset on widescale image usage in Corporate Social Responsibility (CSR) reports using automated methods. We examine (1) associations between CSR report image usage and motivations for impression management, (2) changes in CSR report image usage after controversial events, and (3) market valuation of firms using excessive images. We hypothesize and find that socially problematic industries exhibit higher image usage than others. Firms who voluntarily commit to higher disclosure standards tend to use fewer images, while firms with less extensive textual disclosures in their CSR reports tend to use more images. Tellingly, firms with poorer ratings of CSR performance use more images in CSR reports, and firms increase image usage (albeit weakly) after controversial events. We find no evidence that investors overvalue firms with excessive image usage. Overall, the evidence is consistent with companies using images in CSR reports strategically to enhance stakeholder perception of CSR engagement and performance; such strategic usage does not impact equity valuation.