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Do Firms Hedge in Response to Tax Incentives?

39 Pages Posted: 14 Aug 2001  

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Daniel A. Rogers

Portland State University - School of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: July 2001

Abstract

There are two tax incentives for corporations to hedge: To increase debt capacity and interest tax deductions, and to reduce expected tax liability if the tax function is convex. We test whether these incentives affect the extent of corporate hedging with derivatives. Using an explicit measure of tax function convexity, we find no evidence that firms hedge in response to tax convexity. Our analysis does, however, indicate that firms hedge to increase debt capacity, with increased tax benefits averaging 1.1 percent of firm value. Our results also indicate that firms hedge because of expected financial distress costs and firm size.

Keywords: Corporate hedging; Derivatives; Capital structure; Taxes

JEL Classification: G39, G32, M41

Suggested Citation

Graham, John R. and Rogers, Daniel A., Do Firms Hedge in Response to Tax Incentives? (July 2001). Available at SSRN: https://ssrn.com/abstract=278447 or http://dx.doi.org/10.2139/ssrn.278447

John Robert Graham

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Daniel A. Rogers (Contact Author)

Portland State University - School of Business Administration ( email )

P.O. Box 751
Portland, OR 97207-0751
United States
503-725-3790 (Phone)
503-725-5850 (Fax)

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