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Impact of interest rate swaps on corporate capital structure: an empirical investigation

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  • Jian Yang
  • George Davis
  • David Leatham

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.

Suggested Citation

  • Jian Yang & George Davis & David Leatham, 2001. "Impact of interest rate swaps on corporate capital structure: an empirical investigation," Applied Financial Economics, Taylor & Francis Journals, vol. 11(1), pages 75-81.
    • Handle: RePEc:taf:apfiec:v:11:y:2001:i:1:p:75-81
    DOI: 10.1080/09603100150210282
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    References listed on IDEAS

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    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    2. repec:bla:jfinan:v:44:y:1989:i:1:p:19-40 is not listed on IDEAS
    3. Titman, Sheridan, 1992. "Interest Rate Swaps and Corporate Financing Choices," Journal of Finance, American Finance Association, vol. 47(4), pages 1503-1516, September.
    4. Wall, Larry D., 1989. "Interest rate swaps in an agency theoretic model with uncertain interest rates," Journal of Banking & Finance, Elsevier, vol. 13(2), pages 261-270, May.
    5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    6. repec:bla:jfinan:v:43:y:1988:i:1:p:1-19 is not listed on IDEAS
    7. John J. Pringle & Larry D. Wall, 1987. "Alternate explanations of interest rate swaps," Proceedings 154, Federal Reserve Bank of Chicago.
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    Cited by:

    1. Lau, Chee Kwong, 2016. "How corporate derivatives use impact firm performance?," Pacific-Basin Finance Journal, Elsevier, vol. 40(PA), pages 102-114.
    2. 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.
    3. Gabrielle Wanzenried, 2002. "Capital Structure Dynamics in UK and Continental Europe," Diskussionsschriften dp0209, Universitaet Bern, Departement Volkswirtschaft.

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