Although he said he hadn't seen the study, Mr. Arnott thought that the 30-basis-point average increase for firms during merger years "would suggest that a small minority of firms make that adjustment during merger years. If a handful of firms make a 150-basis-point change in their assumptions, it would average out to a 30-basis-point change for all firms."
Mr. Rauh said in an interview that he thinks the idea of a 150-point hike is too high. "Not too many firms would do that," he said.
But Mr. Rauh believes a 30-point hike average by individual firms during years when they are making acquisitions is more realistic, according to the calculations in the study.
"If companies have something going on (such as an acquisition) that requires a strong equity price, they could do this," said one pension actuary who declined to be named.
However, the actuary added: "I'm not aware of any companies that have wrongly increased the rate of return on their pension assets to prop up their stock price before an acquisition."
The study also investigates the degree to which managers are opportunistic with the assumed rates of return on pension assets.
One of the areas the researchers evaluated is the extent to which choices on assumed returns intersect with the firms' merger activities. Messrs. Bergstresser, Desai and Rauh created a measure of the sensitivity of a firm's overall profits to the assumed long-term rate of return on pension assets. They showed that this sensitivity measure is an important determinant of the levels of, and the changes in, assumed rates of return.
Specifically, a firm whose pension assets are twice as large relative to its operating income as the median firm in the sample makes a long-term rate-of-return assumption that is, on average, approximately 10 basis points higher than the median. A firm in the 90th percentile of sensitivity, on average, has a long-term rate-of-return assumption that is 40 basis points higher than a firm in the 10th percentile. Such differences in return assumptions can have a significant impact on reported earnings for these firms.
The researchers further show that firms make particularly high return assumptions in periods leading up to the acquisition of other firms. This relationship is especially strong for firms whose reported income is the most sensitive to pension assumptions.
"The fact that the magnitude of the estimated effect is higher at firms with higher pension sensitivity implies that the earnings generated by opportunistic adjustments to the long-term rate-of-return assumption around acquisitions are greater than would be the case if the magnitude of the effect was the same across different levels of pension sensitivity," the study said.