Hostname: page-component-848d4c4894-ndmmz Total loading time: 0 Render date: 2024-06-04T04:05:11.465Z Has data issue: false hasContentIssue false
  • English
  • Français

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 nam@gonzaga.edu
*
dj.fairhurst@wsu.edu (corresponding author)
Get access Rights & Permissions [Opens in a new window]

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.

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

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.

References

Ayotte, K., and Gaon, S.. “Asset-Backed Securities: Costs and Benefits of ‘Bankruptcy Remoteness’.” Review of Financial Studies, 24 (2011), 1299–1335.CrossRefGoogle Scholar
Bertrand, M.; Duflo, E.; and Mullainathan, S.. “How Much Should We Trust Differences-in-Differences Estimates?” Quarterly Journal of Economics, 119 (2004), 249–275.CrossRefGoogle Scholar
Bharath, S. T., and Shumway, T.. “Forecasting Default with the Merton Distance to Default Model.” Review of Financial Studies, 21 (2008), 1339–1369.CrossRefGoogle Scholar
Borusyak, K.; Jaravel, X.; and Spiess, J.. “Revisiting Event Study Designs: Robust and Efficient Estimation.” Working Paper, Cornell University (2021).Google Scholar
Bretscher, L.; Schmid, L.; and Vedolin, A.. “Interest Rate Risk Management in Uncertain Times.” Review of Financial Studies, 31 (2018), 3019–3060.CrossRefGoogle Scholar
Campello, M.; Graham, J. R.; and Harvey, C. R.. “The Real Effects of Financial Constraints: Evidence from a Financial Crisis.” Journal of Financial Economics, 97 (2010), 470–487.CrossRefGoogle Scholar
Cardella, L.; Fairhurst, D.; and Klasa, S.. “What Determines the Composition of a Firm’s Cash Reserves?” Journal of Corporate Finance, 68 (2021), 101924.CrossRefGoogle Scholar
Carter, D. A.; Rogers, D. A.; and Simkins, B. J.. “Does Hedging Affect Firm Value? Evidence from the US Airline Industry.” Financial Management, 35 (2006), 53–86.CrossRefGoogle Scholar
Chernenko, S., and Faulkender, M.. “The Two Sides of Derivatives Usage: Hedging and Speculating with Interest Rate Swaps.” Journal of Financial and Quantitative Analysis, 46 (2011), 1727–1754.CrossRefGoogle Scholar
Chu, Y. “Collateral, Ease of Repossession, and Leases: Evidence from Antirecharacterization Laws.” Management Science, 66 (2020), 2801–3294.CrossRefGoogle Scholar
Crane, A. D., and Koch, A.. “Shareholder Litigation and Ownership Structure: Evidence from a Natural Experiment.” Management Science, 64 (2018), 5–23.CrossRefGoogle Scholar
Demeré, P.; Donohoe, M. P.; and Lisowsky, P.. “The Economic Effects of Special Purpose Entities on Corporate Tax Avoidance.” Contemporary Accounting Research, 37 (2020), 1562–1597.Google Scholar
Ersahin, N. “Creditor Rights, Technology Adoption, and Productivity: Plant-Level Evidence.” Review of Financial Studies, 33 (2020), 5784–5820.CrossRefGoogle Scholar
Favara, G.; Gao, J.; and Giannetti, M.. “Uncertainty, Access to Debt, and Firm Precautionary Behavior.” Journal of Financial Economics, 141 (2021), 436–453.CrossRefGoogle Scholar
Feng, M.; Gramlich, J. D.; and Gupta, S.. “Special Purpose Vehicles: Empirical Evidence on Determinants and Earnings Management.” Accounting Review, 84 (2009), 1833–1876.CrossRefGoogle Scholar
Froot, K. A.; Scharfstein, D. S.; and Stein, J. C.. “Risk Management: Coordinating Corporate Investment and Financing Policies.” Journal of Finance, 48 (1993), 1629–1658.CrossRefGoogle Scholar
Géczy, C.; Minton, B. A.; and Schrand, C.. “Why Firms Use Currency Derivatives.” Journal of Finance, 52 (1997), 1323–1354.CrossRefGoogle Scholar
Gormley, T. A., and Matsa, D. A.. “Growing Out of Trouble? Corporate Responses to Liability Risk.” Review of Financial Studies, 24 (2011), 2781–2821.CrossRefGoogle Scholar
Graham, J. R., and Rogers, D. A.. “Do Firms Hedge in Response to Tax Incentives?” Journal of Finance, 57 (2002), 815–839.CrossRefGoogle Scholar
Guay, W., and Kothari, S. P.. “How Much Do Firms Hedge with Derivative Securities?” Journal of Financial Economics, 70 (2003), 423–461.CrossRefGoogle Scholar
Hadlock, C. J., and Pierce, J. R.. “New Evidence on Measuring Financial Constraints: Moving beyond the KZ Index.” Review of Financial Studies, 23 (2010), 1909–1940.CrossRefGoogle Scholar
Hoberg, G., and Maksimovic, V.. “Redefining Financial Constraints: A Text-Based Analysis.” Review of Financial Studies, 28 (2015), 1312–1352.CrossRefGoogle Scholar
Hoberg, G., and Moon, S. K.. “Offshore Activities and Financial vs Operational Hedging.” Journal of Financial Economics, 125 (2017), 217–244.CrossRefGoogle Scholar
Janger, E. J. “The Death of Secured Lending.” Cardozo Law Review, 25 (2003), 1759–1788.Google Scholar
Kettering, K. C. “True Sales of Receivables: A Purpose Analysis.” American Bankruptcy Institute Law Review, 16 (2008), 511–562.Google Scholar
Li, S., Whited, T. M., and Wu, Y.. “Collateral, Taxes, and Leverage.” Review of Financial Studies, 29 (2016), 1453–1500.CrossRefGoogle Scholar
Merton, R. C. “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates.” Journal of Finance, 29 (1974), 449–470.Google Scholar
Nance, D. R.; Smith, C. W.; and Smithson, C.W.. “On the Determinants of Corporate Hedging.” Journal of Finance, 48 (1993), 267–284.CrossRefGoogle Scholar
Purnanandam, A. “Financial Distress and Corporate Risk Management: Theory and Evidence.” Journal of Financial Economics, 87 (2008), 706–739.CrossRefGoogle Scholar
Qiu, Y. “Labor Adjustment Costs and Risk Management.” Journal of Financial and Quantitative Analysis, 54 (2019), 1447–1468.CrossRefGoogle Scholar
Rampini, A. A.; Sufi, A.; and Viswanathan, S.. “Dynamic Risk Management.” Journal of Financial Economics, 111 (2014), 271–296.CrossRefGoogle Scholar
Rampini, A., and Viswanathan, S.. “Collateral, Risk Management, and the Distribution of Debt Capacity.” Journal of Finance, 65, (2010), 2293–2322.CrossRefGoogle Scholar
Rampini, A. A., and Viswanathan, S.. “Collateral and Capital Structure.” Journal of Financial Economics, 109 (2013), 466–492.CrossRefGoogle Scholar
Smith, C. W., and Stulz, R.. “The Determinants of Firms’ Hedging Policies.” Journal of Financial and Quantitative Analysis, 20 (1985), 391–405.CrossRefGoogle Scholar
Strebulaev, I. A., and Yang, B.. “The Mystery of Zero-Leverage Firms.” Journal of Financial Economics, 109 (2013), 1–23.CrossRefGoogle Scholar
Stulz, R. M. “Rethinking Risk Management.” Journal of Applied Corporate Finance, 9 (1996), 8–25.CrossRefGoogle Scholar
Sufi, A. “Bank Lines of Credit in Corporate Finance: An Empirical Analysis.” Review of Financial Studies, 22 (2009), 1057–1088.CrossRefGoogle Scholar
Whited, Y. M., and Wu, Y.. “Financial Constraints Risk.” Review of Financial Studies, 19 (2006), 531–559.CrossRefGoogle Scholar
Supplementary material: PDF

Fairhurst and Nam supplementary material

Fairhurst and Nam supplementary material

Download Fairhurst and Nam supplementary material(PDF)
PDF 289.4 KB