Essays on risk assumption and liquidity management

Dos Santos Rocha, Marco Aurelio

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Description

Title

Essays on risk assumption and liquidity management

Author(s)

Dos Santos Rocha, Marco Aurelio

Issue Date

2015-01-21

Director of Research (if dissertation) or Advisor (if thesis)

Almeida, Heitor

Doctoral Committee Chair(s)

Almeida, Heitor

Committee Member(s)

• Campello, Murillo
• Weisbenner, Scott
• Choi, Jaewon

Department of Study

Finance

Discipline

Finance

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• Credit Default Swaps (CDS)
• Risk shifting
• Lines of credit
• Liquidity Management
• Cash

Abstract

This dissertation contains two chapters: one on CDS and the firm’s behaviour towards risk assumption and the other one corporate liquidity management in emerging markets. The abstracts for each chapter are as follows. Chapter 1: Credit Default Swaps and Risk-Shifting: Good News for Constrained Firms We hypothesize that CDS discriminate risk choices according to firm’s financial status, being constrained firms more restrained than financially flexible ones. We take this prediction to the data using actual CDS trades around the financial crisis of 2007-2008, and a counter- factual CDS sample around the junk bond crisis of 1990. Taken together, estimates from theses two exercises suggest that CDS makes constrained firms more cautious in their in- vestment decisions when the economic environment is uncertain. Our result indicates that CDS could prevent firms from entering distressed renegotiations, reduce the incidence of the empty-creditor problem they give rise to and help stabilize the economy in downturns. Chapter 2: Liquidity Management Instruments in Emerging Markets: Evidence from Brazil We characterize the liquidity management of firms that operate in Brazil through the de- scription of both cash policies and the use of credit lines. We document an increase in cash ratios for firms of all sizes, which results in aggregate cash ratios doubling from 2002 to 2011. We find evidence that this secular increase is associated with the precautionary motive for holding cash and the low potential for credit lines to make up for cash. Domestic credit lines show interesting features that could help explain the side role they play in the liquidity management of Brazilian firms.

Graduation Semester

2014-12

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http://hdl.handle.net/2142/72744

Copyright and License Information

Copyright 2014 Marco Aurelio Dos Santos Rocha

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