This paper studies the impact of a firm's regulatory and audit environment on managers' discretion in choosing from the set of actuarial choices available under Statement of Financial Accounting Standards No. 106. Data disclosed by 500 firms under SFAS No. 106 during the period 1993–96 is used for the tests. Correlation, portfolio, and fixedeffects regression analyses are conducted on this data. The results show that the magnitude of the discretionary component of the postretirement benefit obligation is negatively associated with the extent of the external regulations and auditor quality. Tests on the market response to the disclosed postretirement benefit obligation show that the market values only the nondiscretionary component of the obligation. This research provides evidence that federal regulation and independent audits serve as useful watchdogs of the public interest. Proper financial disclosures also lead to increased transparency and market efficiency in detecting and correcting for the effects of opportunistic actions of managers.

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