Board Composition and Corporate Investment in Interest Rate Derivatives

Oklahoma State University Working Paper

37 Pages Posted: 16 Feb 2001

See all articles by Kenneth A. Borokhovich

Kenneth A. Borokhovich

Miami University

Kelly R. Brunarski

Miami University of Ohio - Department of Finance

Claire E. Crutchley

Auburn University

Betty J. Simkins

Oklahoma State University - Stillwater - Department of Finance

Date Written: February 13, 2001

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.

Keywords: monitoring, board of directors, derivatives

JEL Classification: G3, G32, G39

Suggested Citation

Borokhovich, Kenneth A. and Brunarski, Kelly R. and Crutchley, Claire E. and Simkins, Betty J., Board Composition and Corporate Investment in Interest Rate Derivatives (February 13, 2001). Oklahoma State University Working Paper. Available at SSRN: https://ssrn.com/abstract=260381 or http://dx.doi.org/10.2139/ssrn.260381

Kenneth A. Borokhovich

Miami University ( email )

Oxford, OH 45056
United States
513-529-1502 (Phone)
513-529-8598 (Fax)

Kelly R. Brunarski

Miami University of Ohio - Department of Finance ( email )

Farmer School of Business
Oxford, OH 45056
United States
513-677-2750 (Phone)

Claire E. Crutchley

Auburn University ( email )

415 West Magnolia Avenue
303 Lowder Business Building
Auburn, AL 36849
United States
334-844-3002 (Phone)
334-844-4960 (Fax)

Betty J. Simkins (Contact Author)

Oklahoma State University - Stillwater - Department of Finance ( email )

336 Business Building
Stillwater, OK 74078-4011
United States
405-744-8625 (Phone)
405-744-5180 (Fax)

HOME PAGE: http://spears.okstate.edu/~simkins

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