We're using cookies, but you can turn them off in your browser settings. Otherwise, you are agreeing to our use of cookies. Learn more in our Privacy Policy

Bridge over ocean
1 September 2007 Financial Analysts Journal Volume 63, Issue 5

Corporate Pension Funding and Credit Spreads

  1. Mirko Cardinale

This study empirically tested whether pension information derived from accounting
disclosures is priced in corporate bond spreads. The model was tested on corporate bond
data of U.S. companies for the 2001–04 period. Unfunded pension liabilities are
incorporated in credit spreads, and the sensitivity of market spreads to deficits is
greater than the sensitivity to ordinary long-term debt. This relationship is not,
however, a linear monotonic function, and the sensitivity of bond spreads to deficits is
substantially higher for high-yield than for investment-grade bonds. Moreover, the bond
market prices residual risk even in funded obligations and gives lower weighting to
off-balance-sheet liabilities.

Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content