Uncertainty, Access to Debt, and Firm Precautionary Behavior

Uncertainty, Access to Debt, and Firm Precautionary Behavior

Giovanni Favara, Janet Gao, Mariassunta Giannetti

Series number :

Serial Number: 
682/2020

Date posted :

June 19 2020

Last revised :

September 04 2020
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Keywords

  • Anti-recharacterization laws • 
  • SPVs • 
  • creditor rights • 
  • cash • 
  • intangible assets • 
  • geopolitical risk • 
  • political uncertainty

Better access to debt markets mitigates the effects of uncertainty on corporate policies. We establish this result using the staggered introduction of anti-recharacterization laws in U.S. states. These laws enhanced firms’ ability to borrow by strengthening creditors’ rights to repossess collateral pledged in SPVs.

After the passage of the laws, firms that face more uncertainty hoard less cash and increase payouts, leverage, and investment in intangible assets. Our findings suggest that better access to debt markets shields firms from fluctuations in uncertainty and decreases firms’ precautionary behavior, contributing to the deployment of cash and other internal resources to investment in intangible capital.

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Published in

Published in: 
Publication Title: 
Journal of Financial Economics (JFE), Forthcoming

Authors

Real name:
Giovanni Favara
Real name:
Janet Gao