Defense Date

Fall 8-24-2018

Degree Type


Degree Name



Business Administration

Committee Chair/First Advisor


Committee Member or Co-Chair





There has been a proliferation of alternative investment holdings by defined benefit pension plans during the 21st century. While holdings of alternative investments may advantage pension plans and their sponsoring firms through diversification and/or less volatile returns, they may also present valuation problems because underlying investments in opaquely valued (or marked-to-model) securities contain larger estimation error and uncertainty. Such valuation problems may concern credit reporting agencies because the sponsoring firm’s pension plan liability is uncertain. This problem is exacerbated through agency relationships within pension plans that enable executives and investment managers to engage in opportunistic financial reporting of fair values. In response, credit reporting agencies may adjust the sponsoring firm’s credit rating to compensate for estimation error and uncertainty surrounding the fair values of opaquely valued assets held by the pension plan.

The purposes of this study are to (a) investigate the association between a firm’s credit rating and the investment mix of assets held by its pension plan; and (b) investigate the moderating role that the pension plan’s (i) type of audit and (ii) choice of auditor plays in the association. Specifically, the presence of a limited scope audit, which allows the auditor to perform limited audit procedures on certain investment values, may be

perceived to provide little to no assurance of pension plan asset values. With respect to the choice of auditor, the pension plan’s auditor may be the only effective mechanism to monitor and restrict opportunistic reporting of pension plan asset values. Therefore, credit reporting agencies’ perceptions of audit quality may affect the amount of reliance placed on opaquely valued pension plan asset values when the sponsoring firm’s credit rating is assigned. Big N and industry specialist auditors may be perceived to curtail opportunistic financial reporting and enhance reported fair values of assets held by the pension plan.

This research is an archival study consisting of publicly listed firms incorporated in the U.S. with pension plan data reported in Compustat’s Pension Annual Database for the period of 2011 to 2015. The final sample consists of 1,912 firm-year observations. The results show that pension plan holdings of Level 3 assets have a negative and statistically significant association with a firm’s credit rating, while Level 1 assets are not statistically related to credit ratings. These findings indicate that credit rating agencies likely impound the estimation error and uncertainty pertaining to opaquely valued pension plan assets in the sponsoring firm’s credit rating.

In certain instances, the results also indicate that certain types of pension plan auditors may be perceived to alleviate credit rating agencies’ valuation concerns with respect to reported pension plan asset values. For example, most models indicate that Big 4 and employee benefit plan specialist auditors positively moderate the negative relationship between Level 3 assets. Moreover, the number of models that indicate Big 4 and employee benefit plan specialist auditors positively moderate the relationship between Level 3 assets and credit ratings slightly increases when a limited scope audit is performed, which implies that credit ratings agencies may value pension plan auditor quality more when a limited scope audit is performed. These results have interesting implications for academics, regulators, firms, and auditors.

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