Do Firms Hedge in Response to Tax Incentives?

Posted: 14 Aug 2001

See all articles by John R. Graham

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

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: G32, G39, H25

Suggested Citation

Graham, John Robert and Rogers, Daniel A., Do Firms Hedge in Response to Tax Incentives?. Available at SSRN: https://ssrn.com/abstract=279959

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
United States

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)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
2,731
PlumX Metrics