Defined Benefit Obligations - A Quantitative Study of the Managerial Opportunism within the Accounting of Defined Benefit Obligations

Abstract: In the aftermath of the financial crisis in 2008 the rates on corporate- and government bonds began to diverge (Runesson et al., 2018). The increased differences in bond rates had a large effect on the Swedish firms. As they, due to the lack of a deep market for high-quality corporate bonds, need to apply the rates of government bonds when accounting for their defined benefit obligations (DBOs) (IAS 19). This creates incentives for Swedish firms to deviate from the low government bond rates, in order to mitigate the effect that the low discount rates have on the DBOs. Managers incentives are further enhanced by their substantial discretion over the choice of discount rate, along with the low probability of stakeholders detecting the opportunism due to the complex accounting involved (Comprix & Muller, 2011; Fried et al., 2014; Salewski & Zülch, 2015). The purpose of the thesis is to investigate whether the discount rates used when accounting for DBOs are more opportunistic among firms in countries that needs to apply the rates of government bonds (Sweden), rather than countries that applies the rates of corporate bonds (UK). Thus, our research question (RQ) is stated as follows: Is the choice of discount rate when accounting for DBOs more opportunistic in Swedish firms, compared to the UK firms, due to the low rates of Swedish government bonds? To answer our RQ, we use a quantitative research approach where data was collected from S&P Capital IQ and annual reports between 2008-2017 for 60 Swedish firms, and 260 UK firms. Based on what previous research emphasise as determinants of opportunistic behaviour, three hypotheses were developed. We predict the discount rates to be higher among the Swedish firms, compared to the UK firms in the presence of high chief executive officer (CEO) bonus- and Debt/Equity-ratios (D/E), as well as weaker governance structures. Opportunistic discount rates are identified based on the discount rates deviation from the median within each country, along with the relationship to the predictive variables. A logistic- and a linear regression analysis is used to test our hypotheses. The findings illustrate that Swedish firms have more opportunistic discount rates when accounting for their DBOs compared to the UK firms, when higher CEO bonus- and D/E-ratios are present. Moreover, we argue that the board of directors are insufficient in preventing the opportunistic behaviour among the CEOs regarding DBO-accounting. Furthermore, we illustrate that the Swedish median discount rate levels are abnormally high considering the median levels in the UK, along with the differences in the government- and corporate bond rates. Henceforth, our findings contribute to the literature of DBO-accounting, opportunistic accounting choices, and discretionary discount rates, and are of interest for investors, creditors, auditors, academics, employees and standard setters as it sheds light on a complex issue, of an unknown extent.