Corporate debt issues and interest rate risk management: Hedging or market timing? |
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Authors: | Antonios Antoniou Huainan Zhao Bilei Zhou |
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Institution: | aFRT-C Consulting, Durham DH7 0RW, UK;bFaculty of Finance, Cass Business School, London EC1Y 8TZ, UK;cSchool of Finance, Renmin University of China, Beijing 100872, PR China;dSchool of Business Administration, Hunan University, Changsha 410082, PR China |
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Abstract: | Apart from the obvious reasons for raising capital, a firm can hedge its interest rate exposure by issuing debt, the value of which moves in an opposite direction from the value of its assets as interest rate varies. We examine whether firms in the UK market make full use of debt issuances for hedging purposes or if they have other considerations. Our evidence shows that firms’ choices of debt issues are primarily driven by debt market conditions in an effort to lower their costs of capital rather than managing their firm-specific interest rate exposures. This suggests that market timing, as opposed to hedging, is the primary motivation behind corporate debt issuances. |
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Keywords: | Risk management Debt issuance Hedging Market timing |
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