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.