Unfunded pension liabilities and sponsoring firm credit risk: an international analysis of corporate bond spreads

This paper tests empirically whether pension information derived by corporate pension accounting disclosures is priced in corporate bond spreads. The model represents a hybrid of more traditional accounting ratio-based models of credit risk and structural models of bond spreads initiated by Merton (1974). The model is fitted to 5 years of data from 2002 to 2006 featuring companies from the US and Europe. The paper finds that while unfunded pension liabilities are priced in the overall sample, they are not priced as aggressively as traditional leverage. Furthermore, an extended model shows that the pension–credit risk relation is most evident in the US and Germany, where unfunded pension liabilities are priced more aggressively than traditional forms of leverage. No pension–credit risk relation is found in the other countries sampled, notably the UK, Netherlands and France.

Unfunded Pension Liabilities and the Corporate CDS Market

This article examines the impact of pension deficits on default risk as measured by the premia on corporate credit default swaps (CDS). We find highly significant evidence that unfunded pension liabilities raise one- and five-year CDS premia. However, this relation is not homogeneous across countries, with the U.S. CDS market leading its European counterparts in the pricing of defined-benefit pension risk.

Law, Politics and Financial Development: The Great Reversal of the U.K. Corporate Debt Market

This article examines the role of creditor protection in the development of the U.K. corporate bond market. This market grew rapidly in the late nineteenth century, but in the twentieth century it experienced a reversal, albeit with a short-lived post-1945 renaissance. Such was the extent of the reversal that the market from the 1970s onwards was smaller than it had been in 1870. We find that law does not explain the variation in the size of this market over time. Alternatively, our evidence suggests that inflation and taxation policies were major drivers of this market in the post-1945 era. Copyright © The Economic History Association 2013

Corporate ownership and control in Victorian Britain

Using ownership and control data for 890 firm‐years, this article examines the concentration of capital and voting rights in British companies in the second half of the nineteenth century. We find that both capital and voting rights were diffuse by modern‐day standards. However, this does not necessarily mean that there was a modern‐style separation of ownership from control in Victorian Britain. One major implication of our findings is that diffuse ownership was present in the UK much earlier than previously thought, and given that it occurred in an era with weak shareholder protection law, it somewhat undermines the influential law and finance hypothesis. We also find that diffuse ownership is correlated with large boards, a London head office, non‐linear voting rights, and shares traded on multiple markets.

Risk in Private Finance Initiative Projects::A Public Sector Perspective

The management of public sector risk is increasingly seen as a priority area of UK government policy. This has been highlighted recently by the Prime Minister Gordon Brown who stated that “the issue of public risk is one of the most challenging areas of policy-making for any government” (Strategic Risk, 2008). In response to these challenges, the UK Prime Minister has appointed a new body - the Risk and Regulation Advisory Council (RRAC) which is tasked with improving the way risk to the public is understood and managed. One area of particular concern with regard to the governance of public sector risks involves projects procured via the Private Finance Initiative (PFI). These projects involve long-term contracts, complex multi-party interactions and thus create various risks to public sector clients. Today, most PFI actors acknowledge the potentially adverse effects of these risks and make an effort to prevent or mitigate undesirable results. As a consequence, issues of risk allocation, risk transfer and risk management have become central to the PFI procurement process. This paper provides an overview of the risk categories and risk types which are relevant to the public sector in PFI projects. It analyses risk as a feature of uncertain future project-related events and examines potential pitfalls which can be associated with PFI risk management on the basis of a case study of a high-profile PFI hospital in Scotland. The paper concludes that, despite the trend towards diminished risk profiles during the operational phase, the public sector continues to be exposed to significant risks when engaging in PFI-based procurement.

Does the UK Local Finance Improvement Trust (Lift) Initiative Improve Risk Management in Public-Private Procurement?

The UK government introduced the Private Finance Initiative (PFI) and, latterly, the Local Improvement Finance Trust (LIFT) in an attempt to improve public service provision. As a variant of PFI, LIFT seeks to create a framework for the effective provision of primary care facilities. Like conventional PFI procurement, LIFT projects involve long-term contracts, complex multi-party interactions and thus create various risks to public sector clients. This paper investigates the advantages and disadvantages of LIFT with a focus on how this approach facilitates or impedes risk management from the public sector client perspective. Our paper concludes that LIFT has a potential for creating additional problems, including the further reduction of public sector control, conflicts of interest, the inappropriate use of enabling funds, and higher than market rental costs affecting the uptake of space in the buildings by local health care providers. However, there is also evidence that LIFT has facilitated new investment and that Primary Care Trusts (PCTs) have themselves started addressing some of the weaknesses of this procurement format through the bundling of projects and other forms of regional co-operation.