The Two Sides of Derivatives Usage: Hedging and Speculating with Interest Rate Swaps

2011/06/01 by Sergey Chernenko, Michael W. Faulkender · 1 citation
Business, Management and Accounting · #Risk Management in Financial Firms

paper · pdf · doi:10.1017/s0022109011000391

openalex publication_date 2011/06/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04

Abstract

Abstract Existing cross-sectional findings on nonfinancial firms’ use of derivatives that are usually interpreted as the result of hedging may alternatively be due to speculation. Panel data examinations can distinguish between derivatives practices that endure over time and are therefore more likely to result from hedging, and those that are more transient, thus more consistent with speculation. Our decomposition results indicate that hedging of interest rate risk is concentrated among high-investment firms, consistent with costly external finance. Simultaneously, firms appear to use interest rate swaps to manage earnings and to speculate when their executive compensation contracts are more performance sensitive.

Citations

• Detecting Earnings Management.
• Earnings Management During Import Relief Investigations
• 1998 Wharton Survey of Financial Risk Management by US Non-Financial Firms
• Risk, Return, and Equilibrium: Empirical Tests
• The Determinants of Firms' Hedging Policies
• Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility
• The Effects of Derivatives on Firm Risk and Value
• Are Firms Successful at Selective Hedging?*
• International Evidence on Financial Derivatives Usage

Cited by

• Derivative (finance) [wikipedia]