Corporate Hedging During the Financial Crisis
62 Pages Posted: 23 May 2018 Last revised: 5 Jun 2018
Date Written: May 9, 2018
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: Suggested Citation