Do Managers Close to Zero Pretax Earnings Manage Pension Expense to Avoid Reporting a Financial Statement Loss?

This study examines whether company managers manage pension expense to avoid reporting a financial statement loss. Since capital market participants achieve a greater financial gain when a company moves from being in a negative financial loss position to being in a positive financial gain position, company mangers experience strong incentives to report positive earnings rather than negative earnings. This study extends prior earnings management research by using zero pretax earnings as the benchmark to examine the extent to which managers manage pension expense to avoid reporting a financial statement loss. Managers close to the threshold of zero pretax earnings are predicted and shown to manage actual pension expense downward to increase actual reported earnings to avoid reporting a financial statement loss