Pension Contributions and Earnings Quality

Abstract

We investigate whether defined benefit (DB) pension contributions convey information about earnings quality proxied by different measurements of discretionary accruals. We find that earnings quality is positively associated with total pension contributions. More interestingly, we document a positive but statistically stronger relation between earnings quality and voluntary pension contributions. In contrast, our evidence does not suggest that a similar relationship holds for earnings quality and mandatory pension contributions. Our results are consistent with the theoretical argument that voluntary pension contributions is indicative of firms' earnings quality since both the voluntary pension contributions and earnings quality result from the same set of incentives behind managerial discretions. Our study sheds light on the management's motivation for making voluntary pension contributions and improves our understanding of firms' consideration in funding strategies for DB pension plans.