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Interest rate risk of non-financial firms: who hedges and does it help?

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  • Ryan Niladri Banerjee
  • Julián Caballero
  • Enisse Kharroubi
  • Renée Spigt
  • Egon Zakrajsek

Abstract

Natural language text analysis of 80,000 company financial statements published by 14,000 non-financial firms in the euro area, United Kingdom and United States shows that around 50% of firms with variable rate debt hedge their interest rate risk. Firms that hedge interest rate risk tend to be larger and have smaller cash buffers and lower equity valuations. When interest rates rise, firms that hedge their interest rate risk experience a smaller negative impact on their interest coverage ratios and market valuations. They are also better able to maintain the size of their workforce. Our analysis highlights the importance of, and the challenges in, getting a comprehensive overview of hedging activity among non-financial firms.

Suggested Citation

  • Ryan Niladri Banerjee & Julián Caballero & Enisse Kharroubi & Renée Spigt & Egon Zakrajsek, 2023. "Interest rate risk of non-financial firms: who hedges and does it help?," BIS Bulletins 81, Bank for International Settlements.
    • Handle: RePEc:bis:bisblt:81
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