Pension Contributions and Earnings Quality

We investigate whether defined benefit (DB) pension contributions convey information about earnings quality proxied by different measurements of discretionary accruals (DA). We find that greater DA are negatively is associated with discretionary pension contributions. Since greater DA is associated with lower earnings quality, the result implies a positive relationship between earnings quality and voluntary pension contributions. In contrast, our evidence does not suggest a similar relationship holds for earnings quality and mandatory pension contributions. In addition, while our analysis identifies a negative relation between DA and total pension contributions, the relation is statistically weaker than that between DA and voluntary pension contribution. Robustness tests are conducted and results are found to continue to hold. Our results are consistent with the theoretical argument that voluntary pension contributions are 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.