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Following the research approach of Hann et al. (2007), this study investigates how discretion in the determination of the defined benefit obligation (DBO) is perceived by investors using a sample of listed German companies in the period of 2005–2011. For this, actuarial assumptions – discount interest rates, compensation growth rate and projected future pension increases – are replaced by their respective industry medians to obtain that component of the DBO, which can be attributed to discretion. We find that the discretionary component is not value relevant in overall terms, which is in contrast to prior research. We provide an explanation in the country-specific characteristics of Germany. Furthermore, we find weak evidence that the discretionary component is incorporated in investor's equity valuations when pension plans are distinctly underfunded.

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This study investigates the effect of IFRS adoption on the transparency of financial reporting in Germany. For a sample period from 1995 to 2012, we analyze the development of the degree of earnings management and of disclosure quality using discretionary accruals and disclosure quality scores from an annual report ‘beauty contest’ published by a German business journal as proxies. We find that IFRS adoption is associated with an increase in disclosure quality and with an initial increase in the extent of earnings management. We argue that the latter is driven by factors such as low compliance, lack of experience and weaker enforcement in the early years of IFRS accounting and show that the degree of earnings management decreases from the ‘early’ to the ‘mature’ phase of IFRS accounting. Finally, we provide evidence for a negative association between disclosure quality and earnings management indicating that disclosures potentially constrain earnings management

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