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Interest rate risk management and the mix of fixed and floating rate debt

Oberoi, Jaideep (2017) Interest rate risk management and the mix of fixed and floating rate debt. Journal of Banking and Finance, 86 . pp. 70-86. ISSN 0378-4266. E-ISSN 1872-6372. (doi:10.1016/j.jbankfin.2017.09.001) (KAR id:63376)

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Official URL:
https://dx.doi.org/10.1016/j.jbankfin.2017.09.001

Abstract

We analyze the after-swap mix of fixed and floating rate debt in a sample of non-financial firms, using hand-collected data from a window of time when derivative positions were included in accounting disclosures. To motivate the analyses, we present a simple theoretical model that highlights the special features of interest rate risk. Consistent with the theory, we find that firms that issue more fixed rate debt have higher liquidity ratios and lower operating income ratios. We also document that individual firms actively vary the proportion of their fixed rate debt to a strikingly high extent. There is a debate as to whether such variation should be interpreted as hedging or speculation. We show that the firms more actively varying their debt mix respond to different hedging motives than those with low activity. We then empirically motivate an alternative indicator of speculative activity: co-variation between ex-post profitability of financial decisions and operating results.

Item Type: Article
DOI/Identification number: 10.1016/j.jbankfin.2017.09.001
Uncontrolled keywords: Risk management; Interest rate risk; Fixed rate debt; Active hedging; Speculation; JEL G32; cequfin
Subjects: H Social Sciences
Divisions: Divisions > Kent Business School - Division > Department of Accounting and Finance
Depositing User: Jaideep Oberoi
Date Deposited: 12 Sep 2017 13:05 UTC
Last Modified: 07 Oct 2021 13:30 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/63376 (The current URI for this page, for reference purposes)
Oberoi, Jaideep: https://orcid.org/0000-0002-1101-7612
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