The use of accounting flexibility to reduce labor renegotiation costs and manage earnings

We investigate the determinants of discretionary SFAS 106 choices of non-re gulated firms. We find that more unionized firms are more likely to use imm ediate recognition, consistent with incentives to reduce labor renegotiatio n costs. Immediate recognition is more prevalent among post-adoption plan m odifiers, particularly if their transition obligation is large, consistent with incentives to increase future reported earnings. Immediate recognition , together with post-adoption benefit plan reduction, frees future income f rom the transition obligation amortization expense and adds a positive comp onent as negative prior service costs are amortized. Immediate recognition is less prevalent among firms with higher potential debt contracting costs. (C) 2001 Elsevier Science B.V. All rights reserved.