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Large tariff cuts and corporate hedging: Evidence from interest rate swaps

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  • Zhang, Shu
  • Shen, Chen

Abstract

We examine how trade policy shocks affect firms’ interest rate hedging and debt structure. Using plausibly exogenous large U.S. tariff cuts from 1992 to 2015 as industry-level shocks, we find that exposed firms increase their use of interest rate swaps, converting fixed-rate debt into floating obligations. Drawing on real options and corporate hedging frameworks, we argue that large tariff cuts intensify competition and lower expected borrowing costs through reduced import prices and input costs, raising underinvestment risk while increasing incentives to maintain financial flexibility. Firms dynamically reoptimize their debt composition to capture expected savings and secure funding for time-sensitive projects. Effects are strongest among firms close to their industry’s technological core, in highly substitutable markets, and with low cash buffers. Our findings establish a novel link between international trade policy, corporate risk management, and debt structure.

Suggested Citation

  • Zhang, Shu & Shen, Chen, 2025. "Large tariff cuts and corporate hedging: Evidence from interest rate swaps," Economics Letters, Elsevier, vol. 257(C).
    • Handle: RePEc:eee:ecolet:v:257:y:2025:i:c:s0165176525005282
    DOI: 10.1016/j.econlet.2025.112691
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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