Abstract
We study how collateral requirements affect corporate policy decisions and present evidence that challenges the trade-off theory between risk management and investment policy due to collateral constraints. We compile a novel dataset on collateral and derivative transactions for all U.S. public firms. We show that cash plays a dual role as liquidity management instrument and the main source of collateral for derivative transactions. Exploiting exogenous variation in liquidity and real estate collateral values, we show that cash-collateral constraints are binding for risk management decisions, while the decisions are unaffected by variations in real estate prices. We find a 8% reduction in hedging and a 0.1% reduction in cash-collateral pledged.
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