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Interest rate risk management and the mix of fixed and floating rate debt

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  • Oberoi, Jaideep

Abstract

We analyze the after-swap mix of fixed and floating rate debt in a sample of non-financial firms, using hand-collected data from a window of time when derivative positions were included in accounting disclosures. To motivate the analyses, we present a simple theoretical model that highlights the special features of interest rate risk. Consistent with the theory, we find that firms that issue more fixed rate debt have higher liquidity ratios and lower operating income ratios. We also document that individual firms actively vary the proportion of their fixed rate debt to a strikingly high extent. There is a debate as to whether such variation should be interpreted as hedging or speculation. We show that the firms more actively varying their debt mix respond to different hedging motives than those with low activity. We then empirically motivate an alternative indicator of speculative activity: co-variation between ex-post profitability of financial decisions and operating results.

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  • Oberoi, Jaideep, 2018. "Interest rate risk management and the mix of fixed and floating rate debt," Journal of Banking & Finance, Elsevier, vol. 86(C), pages 70-86.
    • Handle: RePEc:eee:jbfina:v:86:y:2018:i:c:p:70-86
    DOI: 10.1016/j.jbankfin.2017.09.001
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    Cited by:

    1. Christoph Memmel, 2020. "What drives the short‐term fluctuations of banks' exposure to interest rate risk?," Review of Financial Economics, John Wiley & Sons, vol. 38(4), pages 674-686, October.

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    More about this item

    Keywords

    Risk management; Interest rate risk; Fixed rate debt; Active hedging; Speculation;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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