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

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  • Ronan Gallagher
  • Donal McKillop

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.

Suggested Citation

  • Ronan Gallagher & Donal McKillop, 2010. "Unfunded pension liabilities and sponsoring firm credit risk: an international analysis of corporate bond spreads," The European Journal of Finance, Taylor & Francis Journals, vol. 16(3), pages 183-200.
    • Handle: RePEc:taf:eurjfi:v:16:y:2010:i:3:p:183-200
    DOI: 10.1080/13518470903211665
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    References listed on IDEAS

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    1. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, vol. 2(Oct), pages 37-53.
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    Cited by:

    1. Li, Zezeng & Kara, Alper, 2022. "Pension de-risking choice and firm risk: Traditional versus innovative strategies," International Review of Financial Analysis, Elsevier, vol. 81(C).
    2. Randy Jorgensen & Tirimba Obonyo & John R. Wingender, 2024. "De-risking pension plans: the impact on firm value from lump-sum buyouts," Risk Management, Palgrave Macmillan, vol. 26(3), pages 1-19, September.
    3. Zhao, Zucheng & Sutcliffe, Charles, 2024. "Why are pension schemes frozen, and how does a freeze affect the Employer's risk?," International Review of Economics & Finance, Elsevier, vol. 94(C).

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