The impact of duration on management's discount rate choice |
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| Institution: | 1. Stillman School of Business, Seton Hall University, 400 South Orange Avenue, South Orange, NJ 07079, USA;2. Zicklin School of Business, Baruch College-City University of New York, 1 Bernard Baruch Plaza, New York, NY 10010, USA;1. Patterson School of Accountancy, University of Mississippi, University, MS 38677, USA;2. Division of Business, Spring Hill College, Mobile, AL 36608, USA;1. Robert H. Smith School of Business, University of Maryland, College Park, MD 20742, USA;2. Sawyer Business School, Suffolk University, 8 Ashburton Place, Boston, MA 02108-2770, USA |
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| Abstract: | Previous research finds that firms increase their assumed discount rates to minimize their reported pension benefit obligation. This paper demonstrates that firms whose pension plans have short durations lower their discount rates (rather than increase them), since a lower discount rate decreases their pension expense. These results are especially relevant in the present climate of low interest rates and more firms freezing their defined benefit pension plans, thereby shortening the duration of their obligations. Given its importance in shaping management motivation we believe that firms should be required to disclose the duration of their future obligations. |
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