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Corporate Post-Retirement Benefit Plans and Leverage

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  • Söhnke M. Bartram

Abstract

Defined benefit pension and health care plans are important for firm leverage around the world. While consolidating off-balance sheet post-retirement plans increases effective leverage by 32%, firms reduce their level of regular debt by only 22 cents for every dollar of projected benefit obligation, yielding overall 23% higher total leverage of plan sponsors compared with similar firms without post-retirement plans. The most important driver of substitution rates between regular debt and post-retirement obligations is rule of law, followed by labor market freedom and taxes. In contrast, pension guarantee funds and priority of unfunded pension obligations are less important for substitution rates.

Suggested Citation

  • Söhnke M. Bartram, 2016. "Corporate Post-Retirement Benefit Plans and Leverage," Review of Finance, European Finance Association, vol. 20(2), pages 575-629.
    • Handle: RePEc:oup:revfin:v:20:y:2016:i:2:p:575-629.
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    File URL: http://hdl.handle.net/10.1093/rof/rfv021
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    References listed on IDEAS

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    1. Edward Whitehouse, 2005. "Taxation : The Tax Treatment of Funded Pensions," World Bank Publications - Reports 11211, The World Bank Group.
    2. Juan Yermo & Clara Severinson, 2010. "The Impact of the Financial Crisis on Defined Benefit Plans and the Need for Counter-Cyclical Funding Regulations," OECD Working Papers on Finance, Insurance and Private Pensions 3, OECD Publishing.
    3. Fiona Stewart, 2007. "Benefit Protection: Priority Creditor Rights for Pension Funds," OECD Working Papers on Insurance and Private Pensions 6, OECD Publishing.
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    Cited by:

    1. Ellul, Andrew & Pagano, Marco, 2019. "Corporate leverage and employees’ rights in bankruptcy," Journal of Financial Economics, Elsevier, vol. 133(3), pages 685-707.
    2. Armitage, Seth & Gallagher, Ronan, 2019. "Are pension contributions a threat to shareholder payouts?," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 27-42.
    3. Ellul, Andrew & Pagano, Marco, 2017. "Corporate Leverage and Employees’ Rights in Bankruptcy," CEPR Discussion Papers 12033, C.E.P.R. Discussion Papers.
    4. Liu, Guanchun & Liu, Yuanyuan & Zhang, Chengsi & Zhu, Yueteng, 2021. "Social insurance law and corporate financing decisions in China," Journal of Economic Behavior & Organization, Elsevier, vol. 190(C), pages 816-837.
    5. Bartram, Söhnke M., 2018. "In good times and in bad: Defined-benefit pensions and corporate financial policy," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 331-351.

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