Uncertainty, Access to Debt, and Firm Precautionary Behavior

52 Pages Posted: 29 Aug 2017 Last revised: 1 Oct 2018

Giovanni Favara

Federal Reserve Board

Janet Gao

Indiana University - Kelley School of Business

Mariassunta Giannetti

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

Date Written: September 30, 2018

Abstract

Uncertainty affects corporate policies and the real economy, but little is known on which factors mitigate firms’ vulnerability to uncertainty shocks. This paper shows that facilitating access to debt markets mitigates the effects of uncertainty on corporate policies. We use the staggered introduction of anti-recharacterization laws in U.S. states—which strengthened creditors’ rights to repossess collateral pledged in SPVs—to identify firms’ improved access to debt. After the passage of the laws, firms that face more uncertainty hoard less cash, and increase payouts, leverage, and investment in intangible assets. We show that firms’ vulnerability to uncertainty shocks is reduced by the enhanced ability to issue debt through SPVs.

Keywords: SPVs, anti-recharacterization laws, creditor rights, cash, intangible assets

JEL Classification: G3, K4

Suggested Citation

Favara, Giovanni and Gao, Janet and Giannetti, Mariassunta, Uncertainty, Access to Debt, and Firm Precautionary Behavior (September 30, 2018). Kelley School of Business Research Paper No. 17-64; Swedish House of Finance Research Paper No. 17-17. Available at SSRN: https://ssrn.com/abstract=3026939 or http://dx.doi.org/10.2139/ssrn.3026939

Giovanni Favara

Federal Reserve Board ( email )

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

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

Janet Gao

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+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)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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