Collateral Constraints, Financial Constraints, and Risk Management: Evidence From Anti-Recharacterization Laws

62 Pages Posted: 5 Jun 2021

See all articles by Douglas J. Fairhurst

Douglas J. Fairhurst

Washington State University

Yoonsoo Nam

Clemson University - Wilbur O. and Ann Powers College of Business

Date Written: May 2021

Abstract

We use the staggered enactment of anti-recharacterization laws as a plausibly exogenous shock to the value of securitizing collateral through Special Purpose Vehicles (SPVs) and test how collateral values impact corporate risk management. Following the laws’ enactment, we find increases in commodity, foreign exchange, and interest rate hedging, especially for firms with exposure to these risks and that rely on SPVs. Supporting the collateral constraints literature, the effect is weaker for firms that likely need the collateral for external financing, such as financially constrained firms. Our findings highlight fluctuations in collateral values as an important consideration in risk management decisions.

Keywords: risk management, collateral, collateral constraints, anti-recharacterization laws, financial constraints

JEL Classification: G32

Suggested Citation

Fairhurst, Douglas J. and Nam, Yoonsoo, Collateral Constraints, Financial Constraints, and Risk Management: Evidence From Anti-Recharacterization Laws (May 2021). Available at SSRN: https://ssrn.com/abstract=3855730 or http://dx.doi.org/10.2139/ssrn.3855730

Douglas J. Fairhurst (Contact Author)

Washington State University ( email )

Department of Finance and Management Science
Carson College of Business
Pullman, WA 99164-3857
United States

Yoonsoo Nam

Clemson University - Wilbur O. and Ann Powers College of Business ( email )

160 Chandler L. Burns Hall
Clemson, SC 29634
United States

HOME PAGE: http://www.clemson.edu/business/index.html

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