Pension plans’ funded status volatility and corporate credit risk

Abstract

We investigate whether and how U.S. pension plans’ funded status volatility affects firm credit risk. We first show that a firm's funded status volatility is positively related to its bond yield spread. We then find that the adoption of SFAS No.158 (2006) requiring the recognition of pension funding status on the statement of financial position renders the pension plan information more value-relevant, thereby increasing the effect of funded status volatility on bond yield spread. Furthermore, the predictions that funded status volatility affects asset value volatility and incomplete accounting information, which in turn affects corporate credit risk, are empirically supported. Our findings reinforce the need for firms to disclose reliable information about funded status volatility—a major pension plan risk—to external investors.

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