Impact of Interest Rate Swaps on Corporate Capital Structure: An Empirical Investigation

19 Pages Posted: 8 Jun 2003

See all articles by Jian Yang

Jian Yang

University of Colorado at Denver - Business School

George C. Davis

Texas A&M University - Department of Agricultural Economics

David J. Leatham

Texas A&M University - Department of Agricultural Economics

Abstract

Interest rate swaps are the most popular financial derivatives used by US firms. In this paper, the effects of swap usage on corporate financing decisions are empirically examined. Based on a dynamic capital structure theoretical model, we employ a seemingly unrelated regression model with a heteroscedasticity-consistent covariance estimator to estimate these effects. The empirical results show that the firms with higher effective tax rates reduce their optimal debt ratio range when they use interest rate swaps. We also found that the swap users may enlarge the influence of firm size on corporate dynamic debt policy, though it was not clear that it helped reduce or increase the optimal debt ratio range. No effect of swaps usage on the optimal debt ratio range was found related to bankruptcy costs and the volatility of income. The findings imply that the use of swaps can help firms stick to an initial high debt ratio and make more use of the large tax benefits of debts on debt financing decisions.

Keywords: interest rate swaps, capital structure, tax incentive of hedging

JEL Classification: C3, G1, G32

Suggested Citation

Yang, Jian and Davis, George C. and Leatham, David J., Impact of Interest Rate Swaps on Corporate Capital Structure: An Empirical Investigation. Available at SSRN: https://ssrn.com/abstract=322684 or http://dx.doi.org/10.2139/ssrn.322684

Jian Yang (Contact Author)

University of Colorado at Denver - Business School ( email )

1250 14th St.
Denver, CO 80204
United States

George C. Davis

Texas A&M University - Department of Agricultural Economics ( email )

College Station, TX 77843-4218
United States
979-845-3788 (Phone)

David J. Leatham

Texas A&M University - Department of Agricultural Economics ( email )

College Station, TX 77843-4218
United States
979-845-5806 (Phone)
979-862-1563 (Fax)

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