Risk Management with Variable Capital Utilization and Procyclical Collateral Capacity

Management Science, forthcoming

68 Pages Posted: 20 Nov 2020 Last revised: 4 Nov 2023

See all articles by Guojun Chen

Guojun Chen

National University of Singapore

Zhongjin Lu

University of Georgia - Department of Finance

Siddharth Vij

University of Georgia Terry College of Business

Date Written: January 10, 2022

Abstract

We build a risk management model that incorporates variable capital utilization and procyclical collateral capacity. The former means that capital utilization determines production, which affects capital depreciation and risk exposure, linking capital utilization to firms' risk management decisions. The latter means that the ability to borrow and hedge increases with expected profitability. Using a new dataset on hedging and capital utilization of oil and gas producers, we employ novel identification strategies and find that hedging is positively correlated with corporate liquidity and expected profitability, whereas utilization is negatively correlated with liquidity. These results support the key predictions of our theory.

Keywords: Collateral constraint, Corporate hedging, Corporate liquidity, Expected profitability, Procyclical collateral capacity, Variable capital utilization.

JEL Classification: G23, G30, G32

Suggested Citation

Chen, Guojun and Lu, Zhongjin and Vij, Siddharth, Risk Management with Variable Capital Utilization and Procyclical Collateral Capacity (January 10, 2022). Management Science, forthcoming, Available at SSRN: https://ssrn.com/abstract=3719158 or http://dx.doi.org/10.2139/ssrn.3719158

Guojun Chen

National University of Singapore ( email )

NUS Business School
15 Kent Ridge Drive
Singapore, 119245
Singapore

Zhongjin Lu (Contact Author)

University of Georgia - Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6254
United States

Siddharth Vij

University of Georgia Terry College of Business ( email )

620 S. Lumpkin Street
Amos Hall, B324
Athens, GA 30602
United States

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