Do corporations manage earnings to meet/exceed analyst forecasts? Evidence from pension plan assumption changes

The information on the managerial decision on the ERR may not be available to analysts until the annual report is released. According to current pension accounting standards, firms are not required to report the ERR information on the quarterly report. However, analysts could infer an ERR change from management earnings guidance. To investigate such a possibility, we checked First Call Management Earning Guidance Database maintained by I/B/E/S. We searched key words such as “pension,” “pension assumption,” “ERR,” “expected rate of return of pension,” and “pension asset return.” We could not find any evidence of management guidance on ERR changes. In addition, we randomly selected 20 ERR-increasing firms from our sample and reviewed the notes of the quarterly report. We did not detect any discussion on ERR changes in the notes. We also used a key word search to see whether managers disclose ERR changes in the earnings conference calls and did not discover any discussion about ERR changes, although managers occasionally discuss the pension funding status and pension liability discount rate. It is still possible, however, that shrewd analysts could infer ERR changes from the publicly available information or obtain the ERR information through other possible channels. Our regression tests using ESurprise do not completely exclude such a possibility.