Measurement of Financial Leverage in the Presence of Unfunded Pension Obligations.

Key Points

• The study investigates if unfunded pension obligations are perceived as debt by capital market participants and their impact on firm risk.
• Empirical examination of unfunded pension obligations and financial leverage.
• Utilization of Hamada's model from 1972 to relate systematic risk to financial risk and business risk.
• Analysis of market perceptions regarding firm risk with and without including pension liabilities.
• Including unfunded pension liabilities improves the explanatory power of financial leverage measurements.
• The effect of unfunded pension liabilities on perceived firm risk is statistically similar to that of other debts.
• Capital market participants generally view unfunded pension obligations as a type of debt.

Abstract