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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
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.
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- © 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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