The effect of unfunded pension liabilities on corporate bond ratings, default risk, and recovery rate

F. Wang () and Ting Zhang ()

Review of Quantitative Finance and Accounting, 2014, vol. 43, issue 4, 802 pages

Abstract: Unfunded pension liabilities lower ratings of non-senior secured bonds but do not affect ratings of senior secured bonds due to their higher seniority. Pension funding improvement (deterioration) is associated with bond rating upgrade (downgrade). Moreover, large unfunded liabilities increase bond default risk and reduce the recovery rate of bondholders after controlling for credit ratings, suggesting that bond ratings do not fully capture pension underfunding risk. Overall, our results highlight the important effects of unfunded pension obligations on bond ratings, default risk, and creditors’ payoff, and suggest that investors should look beyond bond ratings in making investment decisions. Copyright Springer Science+Business Media New York 2014

Keywords: Defined benefit pension plans; Unfunded pension liabilities; Bond seniority; Bond ratings; Default risk; Recovery rate; G32; H20; J33 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (11)

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DOI: 10.1007/s11156-013-0392-6

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