Title

The Effect of Unfunded Pension Liabilities on Corporate Bond Ratings, Default Risk, and Recovery Rate

Document Type

Article

Publication Date

11-2014

Publication Source

Review of Quantitative Finance and Accounting

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 aftercontrolling 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.

Inclusive pages

781–802

ISBN/ISSN

0924-865X

Comments

Permission documentation is on file.

Publisher

Springer

Volume

43

Issue

4

Peer Reviewed

yes