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

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) increased significantly in comparison with financially sound airlines. Similarly, we find that the hedging propensity increased in a general sample of non-financial firms. In line with theory, we also find that operating performance increased for the affected firms.