The Smoothing of Pension Expenses : A Panel Analysis

This study utilizes recent developments in panel data techniques to evaluate whether the smoothing of pension expenses is neutral in its long-term effect on reported earnings. Adopting a long-term perspective, the empirical analysis also identifies sources of potential deviations. Results suggest that the current smoothing mechanism tends to induce significant biases in the recognized pension expenses. For a majority of the sample firms, the tendency is to overstate the sponsoring firms' earnings in the long run. To a large extent, such biases reflect the combination of both ineffective amortization of the deferred gains and losses and questionable latitude in pension rate discretion