Interest rate swaps: Firm characteristics, motivations and differential market reactions.
Item
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Title
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Interest rate swaps: Firm characteristics, motivations and differential market reactions.
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Identifier
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AAI9405541
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identifier
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9405541
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Creator
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Kim, Sungsoo.
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Contributor
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Adviser: Steven B. Lilien
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Date
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1993
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Language
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English
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Publisher
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City University of New York.
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Subject
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Business Administration, Accounting | Economics, Finance
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Abstract
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Interest rate swaps are a logical response to the market interest rate fluctuations following the Federal Reserve's change in interest rate policy in 1979. Since then the swap market has grown to 3 trillion dollars in notional principal amounts in 1992. But no empirical study of interest rate swaps has been done in either accounting or finance literatures. Empirical investigation of this topic helps users of financial statements and investors to understand this major segment of the capital market and contributes to the literature in this field. The major goal of this study is to empirically explain the interest rate swap transactions from the perspective of users and link the theories with empirical evidence. This study investigates the motivation and characteristics of those companies involved in swap transactions. Differences in the earnings response coefficients for swappers versus non-swappers are also examined.;A search of the National Automated Accounting Research Systems (NAARS) database is performed to identify interest rate swaps or interest rate exchange agreements from 1984 through 1989.;Empirical findings show that swappers are larger in size and have higher leverage than non-swappers. Within swappers, those that change their interest payment from variable to fixed (VF) have higher leverage than those that change from fixed to variable (FV). Empirical results support the hypothesis that firms with different credit ratings engage in swap transaction to take advantage of the arbitrage opportunity created by a bond market structure in which the premium charged to less credit worthy firms in the variable short-term debt market is less than the premium charged in the long-term fixed debt market. The study also finds that interest rate swaps serve as an effective hedging mechanism with nominal costs. Signalling theory advanced by the finance literature to explain swaps is not supported by the empirical findings based on this particular sample. A subset of FV firms was found to be engaged in structured swap transactions to relax their operating cash flow constraints. Differences in earnings quality before and after the swap transactions are not observed, possibly because of inconsistent and incomparable disclosure on swaps during the study period.;More sophisticated analyses of these relatively new transactions are warranted. However, the unavailability of swap gain or loss data leaves no choice but to wait for more systematic disclosures on the swaps under SFASs 105 and 107.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
