Corporate Post-Retirement Benefit Plans and Leverage

Abstract

This paper shows that defined benefit pension and health care plans are important for firm leverage around the world. While consolidating off-balance sheet post-retirement plans typically increases effective leverage by 32%, firms reduce their level of regular debt by only 23 cents for every dollar of projected benefit obligation, yielding overall 24% higher total leverage of plan sponsors compared to similar firms without post-retirement plans. Substitution rates between regular debt and post-retirement obligations are higher in countries with stricter rule of law, less labor market freedom, higher corporate tax rates, as well as better funded DB plans, larger private bond market capitalization and private credit. In contrast, pension guarantee funds and priority of unfunded pension obligations are less important for substitution rates.

Keywords: Capital Structure, post-retirement benefits, pension, health care

JEL Classification: G3, F4, F3