Hostname: page-component-cd9895bd7-dzt6s Total loading time: 0 Render date: 2024-12-27T13:45:57.319Z Has data issue: false hasContentIssue false
  • English
  • Français

The Two Sides of Derivatives Usage: Hedging and Speculating with Interest Rate Swaps

Published online by Cambridge University Press:  01 June 2011

Sergey Chernenko  and
Michael Faulkender
Sergey Chernenko
Affiliation:
Fisher College of Business, Ohio State University, 818 Fisher Hall, Columbus, OH 43210. sergey.chernenko@fisher.osu.edu
Michael Faulkender
Affiliation:
Smith School of Business, University of Maryland, 4411 Van Munching Hall, College Park, MD 20742. mfaulken@rhsmith.umd.edu
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Existing cross-sectional findings on nonfinancial firms’ use of derivatives that are usually interpreted as the result of hedging may alternatively be due to speculation. Panel data examinations can distinguish between derivatives practices that endure over time and are therefore more likely to result from hedging, and those that are more transient, thus more consistent with speculation. Our decomposition results indicate that hedging of interest rate risk is concentrated among high-investment firms, consistent with costly external finance. Simultaneously, firms appear to use interest rate swaps to manage earnings and to speculate when their executive compensation contracts are more performance sensitive.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 6 , December 2011 , pp. 1727 - 1754
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

References

Adam, T. R., and Fernando, C. S.. “Hedging, Speculation and Shareholder Value.” Journal of Financial Economics, 1 (2006), 283–309.CrossRefGoogle Scholar
Allayannis, Y., and Ofek, E.. “Exchange Rate Exposure, Hedging, and the Use of Foreign Currency Derivatives.” Journal of International Money and Finance, 20 (2001), 273–296.CrossRefGoogle Scholar
Bartov, E.; Givoly, D.; and Hayn, C.. “The Rewards to Meeting or Beating Earnings Expectations.” Journal of Accounting and Economics, 33 (2002), 173–204.CrossRefGoogle Scholar
Bartram, S. M.; Brown, G. W.; and Conrad, J.. “The Effects of Derivatives on Firm Risk and Value.” Journal of Financial and Quantitative Analysis, 46 (2011), 967–999.CrossRefGoogle Scholar
Bartram, S. M.; Brown, G. W.; and Fehle, F. R.. “International Evidence on Financial Derivatives Usage.” Financial Management, 38 (2009), 185–206.CrossRefGoogle Scholar
Black Hills Corporation. “2003 Fiscal Year SEC Filing, Form 10-K, Annual Report.” EDGAR Database (2003).Google Scholar
Bodnar, G. M.; Hayt, G. S.; and Marston, R. C.. “1998 Wharton Survey of Financial Risk Management by U.S. Non-Financial Firms.” Financial Management, 27 (1998), 70–91.CrossRefGoogle Scholar
Brown, G. W. “Managing Foreign Exchange Risk with Derivatives.” Journal of Financial Economics, 60 (2001), 401–448.CrossRefGoogle Scholar
Brown, G. W.; Crabb, P. R.; and Haushalter, D.. “Are Firms Successful at Selective Hedging?” Journal of Business, 79 (2006), 2925–2949.CrossRefGoogle Scholar
Burgstahler, D., and Dichev, I.. “Earnings Management to Avoid Earnings Decreases and Losses.” Journal of Accounting and Economics, 24 (1997), 99–126.CrossRefGoogle Scholar
Chava, S., and Purnanandam, A.. “Determinants of the Floating-to-Fixed Rate Debt Structure of Firms.” Journal of Financial Economics, 85 (2007), 755–786.CrossRefGoogle Scholar
Core, J., and Guay, W.. “Estimating the Value of Executive Stock Option Portfolios and Their Sensitivities to Price and Volatility.” Journal of Accounting Research, 40 (2002), 613–630.CrossRefGoogle Scholar
Dechow, P. M.; Sloan, R. G.; and Sweeney, A. P.. “Detecting Earnings Management.” Accounting Review, 70 (1995), 193–225.Google Scholar
DeMarzo, P. M., and Duffie, D.. “Corporate Incentives for Hedging and Hedge Accounting.” Review of Financial Studies, 8 (1995), 743–771.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.CrossRefGoogle Scholar
Faulkender, M. “Hedging or Market Timing? Selecting the Interest Rate Exposure of Corporate Debt.” Journal of Finance, 60 (2005), 931–962.CrossRefGoogle Scholar
Faulkender, M., and Petersen, M. A.. “Does the Source of Capital Affect Capital Structure?” Review of Financial Studies, 19 (2006), 45–79.CrossRefGoogle Scholar
Froot, K. A.; Scharfstein, D. S.; and Stein, J. C.. “Risk Management: Coordinating Corporate Investment and Financing Policies.” Journal of Finance, 48 (1993), 1629–1648.CrossRefGoogle Scholar
Geczy, C.; Minton, B. A.; and Schrand, C.. “Why Firms Use Currency Derivatives.” Journal of Finance, 52 (1997), 1323–1354.CrossRefGoogle Scholar
Geczy, C. C.; Minton, B. A.; and Schrand, C. M.. “Taking a View: Corporate Speculation, Governance and Compensation.” Journal of Finance, 62 (2007), 2405–2443.CrossRefGoogle Scholar
Graham, J. R., and Rogers, D. A.. “Do Firms Hedge in Response to Tax Incentives?” Journal of Finance, 57 (2002), 815–839.CrossRefGoogle Scholar
Graham, J. R., and Smith, C. W. Jr. “Tax Incentives to Hedge.” Journal of Finance, 54 (1999), 2241–2263.CrossRefGoogle Scholar
Guay, W. R. “The Impact of Derivatives on Firm Risk: An Empirical Examination of New Derivatives Users.” Journal of Accounting and Economics, 26 (1999), 319–351.CrossRefGoogle Scholar
Guay, W., and Kothari, S. P.. “How Much Do Firms Hedge with Derivatives?” Journal of Financial Economics, 70 (2003), 423–461.CrossRefGoogle Scholar
Haushalter, G. D. “Financing Policy, Basis Risk, and Corporate Hedging: Evidence from Oil and Gas Producers.” Journal of Finance, 55 (2000), 107–152.CrossRefGoogle Scholar
Jones, J. J. “Earnings Management during Import Relief Investigations.” Journal of Accounting Research, 29 (1991), 193–228.CrossRefGoogle Scholar
Kasznik, R., and McNichols, M. F.. “Does Meeting Earnings Expectations Matter? Evidence from Analyst Forecast Revisions and Share Prices.” Journal of Accounting Research, 40 (2002), 727–759.CrossRefGoogle Scholar
Lemmon, M. L.; Roberts, M. R.; and Zender, J. F.. “Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure.” Journal of Finance, 63 (2008), 1575–1608.CrossRefGoogle Scholar
Matsumoto, D. A. “Management’s Incentives to Avoid Negative Earnings Surprises.” Accounting Review, 77 (2002), 483–514.CrossRefGoogle Scholar
Mian, S. L. “Evidence on Corporate Hedging Policy.” Journal of Financial and Quantitative Analysis, 31 (1996), 419–439.CrossRefGoogle Scholar
Nance, D. R.; Smith, C. W. Jr.; and Smithson, C. W.. “On the Determinants of Corporate Hedging.” Journal of Finance, 48 (1993), 267–284.CrossRefGoogle Scholar
Pennzoil-Quaker State Company. “2000 Fiscal Year SEC Filing, Form 10-K, Annual Report.” EDGAR Database (2000).CrossRefGoogle Scholar
Petersen, M. A., and Thiagarajan, S. R.. “Risk Measurement and Hedging: With and Without Derivatives.” Financial Management, 29 (2000), 5–29.CrossRefGoogle Scholar
Smith, C. W., and Stulz, R. M.. “The Determinants of Firm’s Hedging Policies.” Journal of Financial and Quantitative Analysis, 20 (1985), 391–405.CrossRefGoogle Scholar
Trombley, M. A. Accounting for Derivatives and Hedging. New York: McGraw-Hill Companies, Inc. (2003).Google Scholar
Tufano, P. “Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry.” Journal of Finance, 51 (1996), 1097–1137.CrossRefGoogle Scholar
Tufano, P. “The Determinants of Stock Price Exposure: Financial Engineering and the Gold Mining Industry.” Journal of Finance, 53 (1998), 1015–1052.CrossRefGoogle Scholar