IDEAS home Printed from https://ideas.repec.org/a/eee/empfin/v67y2022icp253-270.html
   My bibliography  Save this article

Corporate hedging fragility in the over-the-counter market

Author

Listed:
  • Calluzzo, Paul
  • Dudley, Evan

Abstract

We study the effects of a derivatives supply shock on corporate hedging based on counterparty derivative provision in the Over-the-Counter market. We find that corporate hedging programs are fragile. When a firm’s counterparty in derivative transactions suffers losses on its loan portfolio, the firm is more likely to lose access to this type of hedging. Affected firms respond by increasing their savings rate and preserving access to corporate lines of credit. These results are not present in a counterfactual experiment that involves capital shocks to the firm’s lenders who do not act as counterparties in over-the-counter derivative transactions.

Suggested Citation

  • Calluzzo, Paul & Dudley, Evan, 2022. "Corporate hedging fragility in the over-the-counter market," Journal of Empirical Finance, Elsevier, vol. 67(C), pages 253-270.
    • Handle: RePEc:eee:empfin:v:67:y:2022:i:c:p:253-270
    DOI: 10.1016/j.jempfin.2022.04.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927539822000366
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jempfin.2022.04.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Viral V. Acharya & Heitor Almeida & Murillo Campello, 2013. "Aggregate Risk and the Choice between Cash and Lines of Credit," Journal of Finance, American Finance Association, vol. 68(5), pages 2059-2116, October.
    2. Hoberg, Gerard & Moon, S. Katie, 2017. "Offshore activities and financial vs operational hedging," Journal of Financial Economics, Elsevier, vol. 125(2), pages 217-244.
    3. João A. C. Santos, 2011. "Bank Corporate Loan Pricing Following the Subprime Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1916-1943.
    4. Henk Berkman & Michael E. Bradbury, 1996. "Empirical Evidence on the Corporate Use of Derivatives," Financial Management, Financial Management Association, vol. 25(2), Summer.
    5. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    6. Erasmo Giambona & Ye Wang & Philip Strahan, 2020. "Derivatives Supply and Corporate Hedging: Evidence from the Safe Harbor Reform of 2005," The Review of Financial Studies, Society for Financial Studies, vol. 33(11), pages 5015-5050.
    7. Bliss, Robert R. & Kaufman, George G., 2006. "Derivatives and systemic risk: Netting, collateral, and closeout," Journal of Financial Stability, Elsevier, vol. 2(1), pages 55-70, April.
    8. Francisco Pérez-González & Hayong Yun, 2013. "Risk Management and Firm Value: Evidence from Weather Derivatives," Journal of Finance, American Finance Association, vol. 68(5), pages 2143-2176, October.
    9. Pierre-Olivier Weill, 2020. "The Search Theory of Over-the-Counter Markets," Annual Review of Economics, Annual Reviews, vol. 12(1), pages 747-773, August.
    10. Gennaioli, Nicola & Shleifer, Andrei & Vishny, Robert, 2012. "Neglected risks, financial innovation, and financial fragility," Journal of Financial Economics, Elsevier, vol. 104(3), pages 452-468.
    11. repec:bla:jfinan:v:59:y:2004:i:4:p:1777-1804 is not listed on IDEAS
    12. Amir Sufi, 2009. "Bank Lines of Credit in Corporate Finance: An Empirical Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1057-1088, March.
    13. Ivilina Popova & Betty Simkins, 2015. "OTC vs. Exchange Traded Derivatives and Their Impact on Hedging Effectiveness and Corporate Capital Requirements," Journal of Applied Corporate Finance, Morgan Stanley, vol. 27(1), pages 63-70, March.
    14. Amir Sufi, 2009. "Bank Lines of Credit in Corporate Finance: An Empirical Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1057-1088.
    15. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    16. Jean Tirole, 2006. "The Theory of Corporate Finance," Post-Print hal-00173191, HAL.
    17. Sreedhar T. Bharath & Tyler Shumway, 2008. "Forecasting Default with the Merton Distance to Default Model," The Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1339-1369, May.
    18. Tufano, Peter, 2003. "Financial innovation," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 6, pages 307-335, Elsevier.
    19. Peter Tufano, 2003. "Financial Innovation," Levine's Working Paper Archive 618897000000000651, David K. Levine.
    20. Riggs, Lynn & Onur, Esen & Reiffen, David & Zhu, Haoxiang, 2020. "Swap trading after Dodd-Frank: Evidence from index CDS," Journal of Financial Economics, Elsevier, vol. 137(3), pages 857-886.
    21. Bartram, Söhnke M. & Brown, Gregory W. & Conrad, Jennifer, 2011. "The Effects of Derivatives on Firm Risk and Value," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 967-999, August.
    22. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. "On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-284, March.
    23. Erik P. Gilje & Jérôme P. Taillard, 2017. "Does Hedging Affect Firm Value? Evidence from a Natural Experiment," The Review of Financial Studies, Society for Financial Studies, vol. 30(12), pages 4083-4132.
    24. Cornaggia, Jess, 2013. "Does risk management matter? Evidence from the U.S. agricultural industry," Journal of Financial Economics, Elsevier, vol. 109(2), pages 419-440.
    25. G. David Haushalter, 2000. "Financing Policy, Basis Risk, and Corporate Hedging: Evidence from Oil and Gas Producers," Journal of Finance, American Finance Association, vol. 55(1), pages 107-152, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gunratan Lonare & Ahmet Nart & Ahmet M. Tuncez, 2022. "Industry tournament incentives and corporate hedging policies," Financial Management, Financial Management Association International, vol. 51(2), pages 399-453, June.
    2. Carter, David A. & Rogers, Daniel A. & Simkins, Betty J. & Treanor, Stephen D., 2017. "A review of the literature on commodity risk management," Journal of Commodity Markets, Elsevier, vol. 8(C), pages 1-17.
    3. Dionne, Georges & Gueyie, Jean-Pierre & Mnasri, Mohamed, 2018. "Dynamic corporate risk management: Motivations and real implications," Journal of Banking & Finance, Elsevier, vol. 95(C), pages 97-111.
    4. Markus Hang & Jerome Geyer‐Klingeberg & Andreas W. Rathgeber & Stefan Stöckl, 2021. "Rather complements than substitutes: Firm value effects of capital structure and financial hedging decisions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 4895-4917, October.
    5. Jerome Geyer-Klingeberg & Markus Hang & Andreas Rathgeber, 2021. "Corporate financial hedging and firm value: a meta-analysis," The European Journal of Finance, Taylor & Francis Journals, vol. 27(6), pages 461-485, April.
    6. Pandher, Gurupdesh & Sun, Jerry, 2023. "Firm performance & effective mitigation of adverse business scenarios," Global Finance Journal, Elsevier, vol. 58(C).
    7. Biguri, Kizkitza & Brownlees, Christian & Ippolito, Filippo, 2022. "Corporate hedging and the variance of stock returns," Journal of Corporate Finance, Elsevier, vol. 72(C).
    8. Wu, Wei-Shao & Fok, Robert C.W. & Chang, Yuanchen & Chen, Chao-Jung, 2022. "Credit default swaps and corporate performance smoothing," Journal of Corporate Finance, Elsevier, vol. 75(C).
    9. Howell, Sabrina T., 2020. "Firm type variation in the cost of risk management," Journal of Corporate Finance, Elsevier, vol. 64(C).
    10. Heitor Almeida & Murillo Campello & Igor Cunha & Michael S. Weisbach, 2014. "Corporate Liquidity Management: A Conceptual Framework and Survey," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 135-162, December.
    11. Almeida, Heitor & Campello, Murillo & Weisbach, Michael S., 2011. "Corporate financial and investment policies when future financing is not frictionless," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 675-693, June.
    12. Duran, Miguel A., 2022. "The risk–return relation in the corporate loan market," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    13. Dionne, Georges & El Hraiki, Rayane & Mnasri, Mohamed, 2023. "Determinants and real effects of joint hedging: An empirical analysis of US oil and gas producers," Energy Economics, Elsevier, vol. 124(C).
    14. Mohamed Mnasri & Georges Dionne & Jean-Pierre Gueyie, 2013. "The Maturity Structure of Corporate Hedging: the Case of the U.S. Oil and Gas Industry," Cahiers de recherche 1337, CIRPEE.
    15. Markus Hang & Jerome Geyer-Klingeberg & Andreas W. Rathgeber & Clémence Alasseur & Lena Wichmann, 2021. "Interaction effects of corporate hedging activities for a multi-risk exposure: evidence from a quasi-natural experiment," Review of Quantitative Finance and Accounting, Springer, vol. 56(2), pages 789-818, February.
    16. Valta, Philip, 2012. "Competition and the cost of debt," Journal of Financial Economics, Elsevier, vol. 105(3), pages 661-682.
    17. Jerome Geyer-Klingeberg & Markus Hang & Andreas W. Rathgeber & Stefan Stöckl & Matthias Walter, 2018. "What do we really know about corporate hedging? A meta-analytical study," Business Research, Springer;German Academic Association for Business Research, vol. 11(1), pages 1-31, February.
    18. Quang Nguyen & Trang Kim & Marina Papanastassiou, 2018. "Policy uncertainty, derivatives use, and firm-level FDI," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 49(1), pages 96-126, January.
    19. Argenton, Cédric & Willems, Bert, 2015. "Exclusion through speculation," International Journal of Industrial Organization, Elsevier, vol. 39(C), pages 1-9.
    20. Monda, Barbara & Giorgino, Marco & Modolin, Ileana, 2013. "Rationales for Corporate Risk Management - A Critical Literature Review," MPRA Paper 45420, University Library of Munich, Germany.

    More about this item

    Keywords

    Corporate hedging; Risk management; Derivative supply shock; Financial crisis; OTC markets;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:empfin:v:67:y:2022:i:c:p:253-270. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jempfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.