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Collateral Constraints, Financial Constraints, and Risk Management: Evidence From Anti-Recharacterization Laws

Published online by Cambridge University Press:  19 April 2022

Douglas (DJ) Fairhurst Open the ORCID record for Douglas (DJ) Fairhurst [Opens in a new window]  and
Yoonsoo Nam
Douglas (DJ) Fairhurst*
Affiliation:
Washington State University Carson College of Business
Yoonsoo Nam
Affiliation:
Gonzaga University School of Business Administration [email protected]
*
[email protected] (corresponding author)
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Abstract

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We use the staggered enactment of anti-recharacterization laws as a plausibly exogenous shock to the value of securitizing collateral through special purpose vehicles (SPVs) and test how collateral values impact corporate risk management. Following the laws’ enactment, we find increases in commodity, foreign exchange, and interest rate hedging, especially for firms with exposure to these risks and that rely on SPVs. Supporting the collateral constraints literature, the effect is weaker for firms that likely need the collateral for external financing, such as financially constrained firms. Our findings highlight fluctuations in collateral values as an important consideration in risk management decisions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 2 , March 2023 , pp. 805 - 836
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful for constructive comments and discussions from Matthew Serfling. We also thank an anonymous referee and Paul Malatesta (the editor). S. M. Zahid provided excellent research assistance. All errors are our own.

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