Interest Rate Cycles and Corporate Risk Management

42 Pages Posted: 18 Mar 2009

See all articles by Peter Christoffersen

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; Aarhus University - CREATES

Amrita Nain

University of Iowa - Henry B. Tippie College of Business

Jaideep S. Oberoi

Kent Business School

Date Written: March 17, 2009

Abstract

We study the ability of US firms to manage interest rate risk during changes in monetary policy. From annual reports we extract interest rate derivative positions and analyze how they change with the cyclical movements in interest rates. Our hand-collected data follows firms' year-end positions in interest rate derivatives from 1990 through 2000, allowing us to evaluate their performance over time as well as in the cross-section. The 1990s constitute a unique period with pronounced interest rate cycles and with derivatives reporting requirements conducive to our analysis. We also investigate whether users of interest rate derivatives differ from non-users and whether those that appear to be speculating using interest rate derivatives differ from hedgers. In our sample, which is drawn from the Standard and Poor's 500 index, about 50% of the firms can be characterized using interest rate derivatives to hedge, about 33% of firms appear to use them to speculate and the remaining 17% do not use interest rate derivatives. Firms that use derivatives are larger, and appear to be more financially levered, have lower return on assets as well as lower market-to-book ratios than non-users. Despite attempting to separate firms that follow consistent hedging policies from those that opportunistically change net derivative exposures over time, we find no significant differences between those more likely to be hedgers and those that appear to be speculators based on standard proxies for financial distress costs and agency costs. However, the operating cash flows of hedgers are more sensitive to interest rate changes, suggesting differences between the underlying businesses of the two categories. We find no systematic evidence that firms categorized as speculators are able to correctly anticipate changes in interest rates.

Keywords: corporate risk management, hedging, market timing, derivatives, interest rate swaps

JEL Classification: G32

Suggested Citation

Christoffersen, Peter and Nain, Amrita and Oberoi, Jaideep S., Interest Rate Cycles and Corporate Risk Management (March 17, 2009). Available at SSRN: https://ssrn.com/abstract=1361295 or http://dx.doi.org/10.2139/ssrn.1361295

Peter Christoffersen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Amrita Nain

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

Jaideep S. Oberoi (Contact Author)

Kent Business School ( email )

University of Kent
Sibson Building, Parkwood Road
Canterbury, Kent CT2 7FS
United Kingdom

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