New research finds that corporate managers appear to tinker with pension return assumptions to boost earnings, and then make asset allocation decisions based on their skewed assumptions.

A new paper from academics Daniel Bergstresser and Joshua Rauh of the Massachusetts Institute of Technology’s department of economics) and Mihir Desai of Harvard University for the Cambridge, Mass.-based National Bureau of Economic Research finds that “managers appear to manipulate firm earnings when they characterize pension assets to capital markets and alter investment decisions to justify, and capitalize on, these manipulations.”

The researchers aim to construct a measure of the sensitivity of reported earnings to the assumed long-term rate of return on pension assets. They find that managers are more aggressive with assumed long-term rates of return when their assumptions have a greater impact on reported earnings.

The researchers also find that managers increase assumed rates of return as they prepare to acquire other firms, and as they exercise stock options, “further confirming the opportunistic nature of these increases.” These assumed rates of return then influence asset allocation within pension plans, they find. Their research suggests that a 25 basis point increase in the assumed rate of return is associated with a 5% increase in equity allocation.

“Taken together, these results suggest that earnings manipulation arising from managerial motivations influences significant managerial investment decisions,” the researchers conclude.