Pension deficits and the design of private debt contracts

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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.

Original languageEnglish
Pages (from-to)1821-1854
Number of pages34
JournalJournal of Financial and Quantitative Analysis
Issue number4
Publication statusPublished - Aug 2019

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