Perceptions of postretirement benefit obligations by bond rating analysts

This research examines the measurement and impounding of alternative measures of a corporation's other postretirement benefits obligation (OPEBs) by an important segment of the capital markets. The Kaplan and Urwitz (1979) model is used as a benchmark from which to assess the importance of an added OPEB variable in the bond rating process. Using the corporate bond rating as the dependent variable, multiple measures of the OPEB obligation are inserted individually as an added independent variable into an N-chotomous probit model. The results for 1987 and 1988 indicate that measures calculated from publicly available information produce highly significant results. The developed postretirement liability measures are found to provide relevant and material information regarding the risk level of a firm's bonds as represented by its bond rating. This insight concerning the additional risk represented by a firm's postretirement benefits is beyond that supplied by the firm's pension information. This suggests that the additional investor default risk attributed to a firm's OPEB can be reasonably proxied by data found in the company's annual report footnote disclosures.