The Effect of Unfunded Pension Liabilities on Corporate Bond Ratings, Default Risk, and Recovery RateReview of Quantitative Finance and Accounting
AbstractUnfunded 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.
CopyrightCopyright © 2014, Springer
Citation InformationFukuo Albert Wang and Ting Zhang. "The Effect of Unfunded Pension Liabilities on Corporate Bond Ratings, Default Risk, and Recovery Rate" Review of Quantitative Finance and Accounting Vol. 43 Iss. 4 (2014)
Available at: http://works.bepress.com/ting-zhang/7/