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| Author: | Li, H. Mao, C.X. |
| Title: | Corporate use of interest rate swaps: Theory and evidence |
| Journal: | Journal of Banking and Finance
2003 : AUG, VOL. 27:8, p. 1511-1538 |
| Index terms: | Banking Interest rates Comparative advantage Theories Models |
| Freeterms: | Lending |
| Language: | eng |
| Abstract: | This study develops a simply theory on interest rate swaps based on the difference between bank loans and public debts. While restrictive covenants of bank loans help reduce agency costs, banks also have natural disadvantages in bearing interest rate risk due to their floating liabilities. A firm wanting a fixed-rate loan can borrow a floating-rate loan from a bank and enter an interest rate swap to hedge the interest rate risk. Consistent with our theory, it is empirically found that fixed-rate swap payers generally have lower credit ratings, higher leverage ratios, higher percentages of long-term floating-rate loans, and are more likely to use bank loans than floating-rate swap payers. |
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