Derivatives Supply and Corporate Hedging: Evidence from the Safe Harbor Reform of 2005

Erasmo Giambona (), Ye Wang and Philip Strahan

The Review of Financial Studies, 2020, vol. 33, issue 11, 5015-5050

Abstract: This article analyzes the importance of supply-side fluctuations for corporate hedging. To establish a causal link, we exploit a regulatory change that allows derivatives counterparties to circumvent the Bankruptcy Code’s automatic stay: the Safe Harbor Reform of 2005. Following the reform-induced expansion in the availability of derivatives, fuel hedging by airlines nearing financial distress (those that benefited most from the reform) significantly increased in comparison with financially sound airlines. We find that the hedging propensity similarly increased in a general sample of nonfinancial firms. In line with theory, we also find that operating performance increased for the affected firms.

JEL-codes: G32 G33 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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