Herd Behavior in Accounting Policies : Write-off policy of UPBO in Japan

This paper investigates rationality of herd behavior in the accounting policy decisions by using a write-off policy of unfunded pension benefit obligation (UPBO) as a research material. Although the accounting standard for retirement benefits in Japan in 2000 allowed the companies to choose the write-off period between one year and fifteen years depending on their write-off abilities, more than 60% of the companies disclosed the period within 3 years, especially one year before the balance sheet date. There might have been herd behavior in policy selections with the companies that currently reported poor income and nonetheless chose a short period of write-off policy. We found that many of these companies did not unreasonably write–off UPBO and that the capital market saw through whether their write-off policies were concomitant with their capabilities or not. If a market is efficient and participants are aware of it, accounting regulator’s policy for giving the companies the room for choice does not cause an irrational herd behavior in accounting policy