Why UK companies hedge interest rate risk
Purpose – The purpose of this paper is to examine the interest rate risk management (IRRM) practices of UK companies. In particular, the study examines five theories that have been advanced in the literature to explain why companies hedge: tax and regulatory arbitrage; under-investment, volatility of earnings and future planning; financial distress; managerial self-interest; and economies of scale. Design/methodology/approach – The paper uses a questionnaire survey to examine the importance of hedging theories and to look at the detailed risk management practices of companies. Findings – The research findings confirm that all five theories of financial risk management have some support in practice. However, while the responses to some questions supported the theories, other information elicited from the questionnaires did not. This finding demonstrates that studies which employ large disaggregated datasets that result in generalised conclusions often miss the dynamic nature of corporate affairs and that, as such, more qualitative research is needed in this area. Originality/value – The use of a questionnaire survey facilitates an investigation of the IRRM practices of companies on an individual basis rather than the aggregated analysis afforded by most quantitative studies in finance. In addition, the qualitative approach adopted here permits an examination of many factors that relate to risk management practices, rather than just a limited number of financial ratios or factors that are typically used in studies of large datasets.
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Volume (Year): 24 (2007)
Issue (Month): 1 (March)
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