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Impact Of Interest Rate Swaps On Corporate Captial Structure: An Empirical Investigation

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  • Yiang, Jian
  • Leatham, David J.
  • Davis, George C.

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, a seemingly unrelated regression model with a heteroscedasticity-consistent covariance estimator to estimate these effects is employed. The empirical results show that the firms with higher effective tax rates reduce their optimal debt ratio range when they use interest rate swaps. It was 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.
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Suggested Citation

  • Yiang, Jian & Leatham, David J. & Davis, George C., 1998. "Impact Of Interest Rate Swaps On Corporate Captial Structure: An Empirical Investigation," 1998 Regional Committee NC-221, October 5-6, 1998, Louisville, Kentucky 132273, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
    • Handle: RePEc:ags:nc1998:132273
    DOI: 10.22004/ag.econ.132273
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    Cited by:

    1. is not listed on IDEAS
    2. Gabrielle Wanzenried, 2002. "Capital Structure Dynamics in UK and Continental Europe," Diskussionsschriften dp0209, Universitaet Bern, Departement Volkswirtschaft.
    3. B. Charumathi & Hima Bindu Kota, 2012. "On the Determinants of Derivative Usage by Large Indian Non-financial Firms," Global Business Review, International Management Institute, vol. 13(2), pages 251-267, June.
    4. Lau, Chee Kwong, 2016. "How corporate derivatives use impact firm performance?," Pacific-Basin Finance Journal, Elsevier, vol. 40(PA), pages 102-114.

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