Derivatives Supply and Corporate Hedging: Evidence from the Safe Harbor Reform of 2005

80 Pages Posted: 1 Nov 2017 Last revised: 11 Sep 2019

See all articles by Erasmo Giambona

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate

Ye Wang

School of Banking and Finance, University of International Business and Economics

Date Written: September 9, 2019

Abstract

This article analyzes the importance of supply-side fluctuations for corporate hedging. To establish a causal link, we exploit a regulatory change that allows derivatives counterparties to circumvent the Bankruptcy Code’s automatic stay: the Safe Harbor Reform of 2005. Following the reform-induced expansion in the availability of derivatives, fuel hedging by airlines nearing financial distress (those that benefited most from the reform) increased significantly in comparison with financially sound airlines. Similarly, we find that the hedging propensity increased in a general sample of non-financial firms. In line with theory, we also find that operating performance increased for the affected firms.

Keywords: supply-side frictions, safe harbor reform, fuel hedging, airlines, firm value, executive compensation

JEL Classification: G32, G33

Suggested Citation

Giambona, Erasmo and Wang, Ye, Derivatives Supply and Corporate Hedging: Evidence from the Safe Harbor Reform of 2005 (September 9, 2019). Available at SSRN: https://ssrn.com/abstract=3062048 or http://dx.doi.org/10.2139/ssrn.3062048

Erasmo Giambona (Contact Author)

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate ( email )

721 University Avenue
RM 120-D
Syracuse, NY 13244-2450
United States
315 443-4885 (Phone)

Ye Wang

School of Banking and Finance, University of International Business and Economics ( email )

Beijing
China

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