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Korean J Financ Stud > Volume 46(2); 2017 > Article
Korean Journal of Financial Studies 2017;46(2):305-342.
DOI: https://doi.org/10.26845/KJFS.2017.    Published online March 31, 2017.
The Effects of Pension Funding Levels on Credit Ratings
Jong-seo Choi, Jung-hee Noh
확정급여형 퇴직급여채무 대비 연금자산의 적립수준이 회사채 신용등급에 미치는 영향
최종서, 노정희
This study investigates whether funding level of defined benefit pension liabilities affects corporate bond ratings. In order to pursue the research objective, we collect 3,194 firm-year observations of non-financial companies listed in the KRX which adopted DB pension plans over the period of 2005 to 2014. We employ ordered probit model for test purpose whereby corporate credit ratings are regressed on pension funding levels and control variables. We also use ordinary least square analysis to examine whether the magnitude of funding level changes is associated with the bond rating changes. According to the Guarantee of Workers` Retirement Benefit Act (Article 16), firms with DB pension plans shall maintain the ability to pay the benefits. In order to secure such ability, employers are required to maintain “minimum level of reserve” at the end of each fiscal year. If the reserve balance proves to be less than the required minimum level at any fiscal year end, employers should make up for the deficiency in the following 3 years. The replenishment process has a direct impact on the company`s internal cash resources. Moreover, pension liabilities shall be paid in preference to taxes, public charges and other claims. When a firm goes into bankruptcy, unfunded pension liabilities are senior to secured or unsecured bond payments. As such, the claim of unfunded pension obligations could potentially reduce the future payoff to other bondholders, resulting in lower credit ratings. Consistent with expectations, our findings suggest that low pension funding level tends to decrease bond`s credit rating. In addition, an improvement or deterioration of pension funding levels is associated with bond rating changes. We find that this relationship is more pronounced for under-funded firms, whose reserve balance is below the required minimum level. This study is, to our knowledge, among the first research endeavors undertaken to examine the effects of unfunded pension liabilities on corporate bond credit ratings in Korean capital market context. Notably in this paper, we document the asymmetric relationship between the funding level of DB pension plans and corporate credit ratings. The results of this study is expected to provide practical implications to corporate bond investors and contribute to rational decision making by capital market participants.
Key Words: 신용등급,연금자산적립수준,채권투자,퇴직급여채무,확정급여형 퇴직연금제도,Credit Ratings,Defined Benefit Pension Plan,Investment Decisions,Pension Accounting,Pension Funding Level

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