Does recognition versus disclosure of pension liabilities affect credit ratings? Evidence from Japan

Whether credit market participants process disclosure and recognition of pension information differently has not been fully explored. To fill this gap, this study investigates whether the change in a pension accounting standard related to the recognition rule influences firms’ credit risk in Japan. Statement No. 26, Accounting Standard for Retirement Benefits, stipulates that firms recognize previously disclosed pension information on the balance sheet. Employing the implementation of Statement No. 26, I explore how differences between disclosed and recognized pension liabilities affect credit ratings. I find that off–balance sheet pension liabilities are associated with credit ratings prior to Statement No. 26. I also find similar relations between disclosure versus recognition of pension liabilities and credit ratings. When firms have a small pension plan deficit, off–balance sheet pension liabilities provide risk-relevant information, and the risk relevance of disclosed and recognized pension liabilities is statistically similar. My overall results suggest that mandating pension recognition does not affect the credit risk assessment by credit rating agencies.