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

Ronan Gallagher, Donal McKillop

Research output: Contribution to journalArticle

1 Citation (Scopus)

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.
Original languageEnglish
Pages (from-to)183-200
Number of pages18
JournalEuropean Journal of Finance
Volume16
Issue number3
Early online date14 Oct 2009
DOIs
Publication statusPublished - 2010

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)

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