Anticipatory Effects of Recognizing Off-Balance Sheet Liabilities on Financial Leverage Choice: Evidence from Accounting for Retirement Benefits in Japan

ABSTRACT This study examines the anticipatory effects of recognizing previously off-balance sheet liabilities for retirement benefits on corporate financial decisions. We focus on the issuance of the Accounting Standards Board of Japan’s Statement No. 26, Accounting Standard for Retirement Benefits (Statement 26). Statement 26 affects only Japanese firms preparing consolidated financial statements (recognition firms), not those preparing only unconsolidated financial statements (disclosure firms). By comparing these two groups, we find that financial leverage decreases more for recognition firms than for disclosure firms after the issuance of Statement 26. This anticipatory effect is more pronounced for recognition firms with larger unrecognized retirement liabilities, and these firms tend to increase their shareholders’ equity to reduce their financial leverage. Overall, this study supports the idea that the issue of recognition versus disclosure matters in corporate financial decision-making. Data Availability: All data are available from the commercial data sources cited in this paper. JEL Classifications: M41; M48; G32.