An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Xiaowen Jiang
University of Cincinnati

Abstract: This study investigates whether the delayed recognition of gains and losses under SFAS No. 87 is neutral in its long-run effect on reported earnings. Results from time-series analyses suggest that delayed recognition tends to induce an upward bias in reported earnings. The corridor amortization procedure produces highly persistent unrecognized gains or losses and allows deferred losses to persist and accumulate. Cross-sectional regression results show that the consequent bias in sponsoring firms’ earnings is positively associated with the choice of the expected rate of return on plan assets. Further, the documented bias is material and of economic significance. In addition, firm-specific regression analyses reveal that aggressiveness in exploiting the delayed recognition feature and its amortization scheme is likely to be pervasive.

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