Corporate Hedging During the Financial Crisis

62 Pages Posted: 23 May 2018 Last revised: 5 Jun 2018

See all articles by Paul Calluzzo

Paul Calluzzo

Queen's University - Smith School of Business

Evan Dudley

Queen's University - Smith School of Business

Date Written: May 9, 2018

Abstract

We study corporate hedging during the 2007-2008 financial crisis. We find that hedging programs are fragile. Firms whose lenders suffered losses on their mortgage portfolios were more likely to lose access to over-the-counter derivatives, and this effect was strongest among unrated and below investment grade firms. Affected firms responded by drawing down existing lines of credit, and saving more out of realized cash-flows. Terminations of hedging programs decreased firm value by 11% to 28% in unrated and below investment grade firms. These value effects were largest among firms that did not have alternative sources of liquidity to draw upon.

Keywords: Corporate hedging, liquidity risk management, financial crisis, credit lines, cash-flow sensitivity of cash

JEL Classification: G21, G32

Suggested Citation

Calluzzo, Paul and Dudley, Evan, Corporate Hedging During the Financial Crisis (May 9, 2018). Available at SSRN: https://ssrn.com/abstract=3176156 or http://dx.doi.org/10.2139/ssrn.3176156

Paul Calluzzo

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Evan Dudley (Contact Author)

Queen's University - Smith School of Business ( email )

Goodes Hall
Kingston, Ontario K7L 3N6
Canada

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