Unfunded pension liabilities and sponsoring firm credit risk: an international analysis of corporate bond spreads

Ronan Gallagher and Donal McKillop

The European Journal of Finance, 2010, vol. 16, issue 3, 183-200

Abstract: This paper tests empirically whether pension information derived by corporate pension accounting disclosures is priced in corporate bond spreads. The model represents a hybrid of more traditional accounting ratio-based models of credit risk and structural models of bond spreads initiated by Merton (1974). The model is fitted to 5 years of data from 2002 to 2006 featuring companies from the US and Europe. The paper finds that while unfunded pension liabilities are priced in the overall sample, they are not priced as aggressively as traditional leverage. Furthermore, an extended model shows that the pension-credit risk relation is most evident in the US and Germany, where unfunded pension liabilities are priced more aggressively than traditional forms of leverage. No pension-credit risk relation is found in the other countries sampled, notably the UK, Netherlands and France.

Keywords: defined benefit pension scheme; pension funding; credit risk; corporate bond spreads (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (3)

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DOI: 10.1080/13518470903211665

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