Pension Deficits and the Design of Private Debt Contracts

59 Pages Posted: 29 Mar 2018

See all articles by Balasingham Balachandran

Balasingham Balachandran

La Trobe University - School of Economics and Finance; Financial Research Network (FIRN)

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Van Vu

Department of Economics and Finance, La Trobe University

Date Written: March 22, 2018

Abstract

We find a positive relation between the amount of pension deficits and the cost of bank loans. The effect of pension deficits on the costs of bank loans is driven by financial constraints, information asymmetry problems, and higher pension investment risk. Banks tighten lending terms for firms with larger pension deficits by requiring collateral, increasing the number of loan covenants and shortening loan maturity. Borrowers with larger pension deficits are also more likely to violate covenants in the future. Collectively, these findings indicate that pension deficits represent an additional source of risk priced by banks.

Suggested Citation

Balachandran, Balasingham and Duong, Huu Nhan and Vu, Van, Pension Deficits and the Design of Private Debt Contracts (March 22, 2018). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=3148440

Balasingham Balachandran (Contact Author)

La Trobe University - School of Economics and Finance ( email )

La Trobe University
Bundoora, Vic, 3086
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Van Vu

Department of Economics and Finance, La Trobe University ( email )

Melbourne, 3086
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
100
Abstract Views
551
rank
264,915
PlumX Metrics