Board Composition and Corporate Investment in Interest Rate Derivatives

Abstract:     
In recent years, boards of directors have been called upon to take a more active role in affecting policy for corporate derivative investments. This study provides new evidence on the motives for corporate hedging with interest rate derivatives by examining the relation between the quality of the firms' monitoring mechanisms and the quantity of their investments in interest rate derivatives. Since the capital structure decision and hedging decision are considered to be endogenous, the firm's capital structure and their interest rate derivative decisions are modeled simultaneously. There is a positive relation between the relative influence of outside directors and the quantity of interest rate derivatives used by firms. This evidence is consistent with boards of directors who take active roles in the determination of derivatives use. If outside directors effectively monitor management, this evidence is also consistent with corporate interest rate hedging in the interests of shareholders.

Number of Pages in PDF File: 37

Keywords: monitoring, board of directors, derivatives

JEL Classification: G3, G32, G39

working papers series