Employee Benefit Plans and Bank Loans

Abstract

This study provides robust evidence that firms that offer pension plans to their employees (pension firms) pay lower loan spreads on average compared to firms that do not offer any pension plan (cashwage firms). Employee stock ownership plans (ESOP) are more effective at reducing financing costs compared to traditional defined benefit (DB) and profit-sharing plans. The negative effect of ESOP (profit-sharing) plans is stronger when the union density is high (less) and firms have assets that are less (more) illiquid and specific in nature. For firms belonging to industries with a lower number of job opportunities, as well as firms with superior information quality and highly leveraged firms, profit-sharing and ESOP firms have lower loan spreads than cashwage firms. Compared to cashwage firms, loans undertaken by profit-sharing firms have a larger number of debt covenants, whereas ESOP firms are less likely to provide collateral. DB plans do not have any significant effect on the design of loan contracts.