Collateral Constraints, Financial Constraints, and Risk Management: Evidence From Anti-Recharacterization Laws. (19th April 2022)

• Record Type: Journal Article
• Authors: Fairhurst, Douglas (DJ); Nam, Yoonsoo
• Is Part Of: Journal of financial and quantitative analysis. Volume 58:Number 2(2023)
• Page Start: 805
• Page End: 836
• Publication Date: 2022-04-19
• Subjects: Finance -- Periodicals; Investments -- Mathematics -- Periodicals; 332.05
• DOI: 10.1017/S0022109022000254
• Languages: English
• ISSNs: 0022-1090

Abstract

Abstract: 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.