Earnings management using estimates and the timing of adoption of accounting standards: An empirical examination of pensions

This study investigates the relationship between adoption timing of Statement of Financial Accounting Standards 87 and earnings management after adoption. Earnings management, defined consistent with Schipper (1989), is tested through hypotheses using (1) a portfolio approach and (2) pension rates. One Hypothesis uses a Modified Jones (1991) Model as a proxy for discretionary accruals and the other uses pension rate estimates.^ Statistically significant relationships are found between adoption timing and (1) discretionary accruals and (2) estimated rate-of-return (ROR) on pension plan assets. Early adopting firms tend to have lower discretionary accruals after adoption than on-time adopters. They also tend to use higher ROR estimates which are not supported by higher actual returns. Thus, while early adopters may be using ROR to manage income, this tends to not result in higher discretionary accruals. ^