Published online by Cambridge University Press: 14 September 2018
We find a positive relation between the amount of pension deficits and the cost of bank loans. The effect of pension deficits on the cost 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.
We gratefully acknowledge helpful comments from Joao Cocco (the referee), Vidhan Goyal, Iftekhar Hasan, Paul Malatesta (the editor), Nadia Massoud, Phong Ngo, Shams Pathan, and Ghon Rhee; participants at the 2015 International Finance and Banking Society (IFABS) Conference, the 2016 Financial Research Network (FIRN) Banking and Financial Stability Meeting, and the 2017 FIRN Corporate Finance Meeting; and seminar participants at the University of Hawaii and Newcastle University seminar series. Vu is grateful to the IFABS for the Young Researcher Travel Grant (IFABS-OXFCONF-1503).
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