Uncertainty, Access to Debt, and Firm Precautionary Behavior

59 Pages Posted: 29 Aug 2017 Last revised: 16 Sep 2020

See all articles by Giovanni Favara

Giovanni Favara

Board of Governors of the Federal Reserve System

Janet Gao

McDonough School of Business

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 25, 2020


Better access to debt markets mitigates the effects of uncertainty on corporate policies. We establish this result using the staggered introduction of anti-recharacterization laws in U.S. states. These laws enhanced firms’ ability to borrow by strengthening creditors’ rights to repossess collateral pledged in SPVs. After the passage of the laws, firms that face more uncertainty hoard less cash and increase payouts, leverage, and investment in intangible assets. Our findings suggest that better access to debt markets shields firms from fluctuations in uncertainty and decreases firms’ precautionary behavior, contributing to the deployment of cash and other internal resources to investment in intangible capital.

Keywords: SPVs, anti-recharacterization laws, creditor rights, cash, intangible assets, geopolitical risk, political uncertainty

JEL Classification: G3, K4

Suggested Citation

Favara, Giovanni and Gao, Janet and Giannetti, Mariassunta, Uncertainty, Access to Debt, and Firm Precautionary Behavior (August 25, 2020). Journal of Financial Economics (JFE), Forthcoming, Swedish House of Finance Research Paper No. 17-17, Kelley School of Business Research Paper No. 17-64, European Corporate Governance Institute – Finance Working Paper No. 682/2020, Available at SSRN: https://ssrn.com/abstract=3026939 or http://dx.doi.org/10.2139/ssrn.3026939

Giovanni Favara

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.giovannifavara.com

Janet Gao

McDonough School of Business ( email )

Washington, DC 20057
United States

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm

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