Derivatives supply and corporate hedging: Evidence from the safe harbor reform of 2005

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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.

Original languageEnglish (US)
Pages (from-to)5015-5050
Number of pages36
JournalReview of Financial Studies
Volume33
Issue number11
DOIs
StatePublished - 2021

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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