The Effect of Erisa on Capital Structure Measures*

On Bond Ratings and Pension Obligations: A Note

“…Nine variables were considered, including the five ERISA measures suggested by Moody's 9 and four traditional ratios found significant in earlier bond studies (see, e.g., [2], [6], [12], [13], and [17]).…”

“…Thus, for firms with substantial unfunded liabilities, the claims of the debentures' holders effectively were subordinated to those of the pension beneficiaries, and one would expect to see this reflected in the bond ratings. Regan and others [9], [14] have suggested that traditional ratios should be revised to reflect the new priority of pension obligations. Moody's Bond Survey [10] introduced new ratios that incorporate pension costs and obligations.…”

“…There were too few Aaa issues (six) during the sample period to construct the necessary discriminant function. Pinches and Mingo[ 12] encountered the same problem.8 A list of the sample firms is available from the authors 9. These are the measures of pension obligations suggested by one of the two major bond-rating agencies.…”