Corporate Hedging and Collateral Constraints: Evidence from a Difference-in-Difference Approach

36 Pages Posted: 17 Jun 2017 Last revised: 10 Jan 2019

See all articles by Håkan Jankensgård

Håkan Jankensgård

Lund University - Department of Business Administration; Knut Wicksell Centre for Financial Studies

Date Written: June 12, 2017

Abstract

Financially constrained firms have incentives to hedge in order to protect against declines in their financial status. Conversely, lack of collateral may prevent them from doing so. We bring evidence from a difference-in-difference approach to shed light on this central question in corporate hedging theory. We use hand-collected data from the oil and gas industry that incorporates an exogenous shock that sharply increased the cost of external financing. The evidence supports collateral-based theories of risk management. We document a broad absolute decrease in the use of hedging and a significant relative decrease in hedging in financially constrained firms.

Keywords: Corporate hedging; financial distress, risk management, financial constraints, collateral constraints

JEL Classification: G30, G32

Suggested Citation

Jankensgård, Håkan, Corporate Hedging and Collateral Constraints: Evidence from a Difference-in-Difference Approach (June 12, 2017). Available at SSRN: https://ssrn.com/abstract=2984823 or http://dx.doi.org/10.2139/ssrn.2984823

Håkan Jankensgård (Contact Author)

Lund University - Department of Business Administration ( email )

Box 117
SE-221 00 Lund, S-220 07
Sweden

Knut Wicksell Centre for Financial Studies ( email )

Box 7080
Lund, SE-220 07
Sweden

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