Collateral Constraints, Financial Constraints, and Risk Management: Evidence From Anti-Recharacterization Laws
62 Pages Posted: 5 Jun 2021
Date Written: May 2021
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: Suggested Citation