Do firms hedge in response to tax incentives?

Published

Journal Article

There are two tax incentives for corporations to hedge: to increase debt capacity and interest tax deductions, and to reduce expected tax liability if the tax function is convex. We test whether these incentives affect the extent of corporate hedging with derivatives. Using an explicit measure of tax function convexity, we find no evidence that firms hedge in response to tax convexity. Our analysis does, however, indicate that firms hedge to increase debt capacity, with increased tax benefits averaging 1.1 percent of firm value. Our results also indicate that firms hedge because of expected financial distress costs and firm size.

Full Text

Duke Authors

Cited Authors

  • Graham, JR; Rogers, DA

Published Date

  • January 1, 2002

Published In

Volume / Issue

  • 57 / 2

Start / End Page

  • 815 - 839

International Standard Serial Number (ISSN)

  • 0022-1082

Digital Object Identifier (DOI)

  • 10.1111/1540-6261.00443

Citation Source

  • Scopus