John Graham
Duke University, Durham, NC
Daniel Rogers
Northeastern University, Boston, MA
ABSTRACT
We study a unique sample of derivative holdings for a cross-section of 531 US firms. The data measure the extent of derivatives activity, which allows us to identify certain incentives to hedge that we do not find using a binary hedging variable. Our evidence is consistent with firms using derivatives to increase value by 1)attenuating underinvestment problems, and 2)increasing debt capacity. Hedging activity also increases in firm size and foreign currency exposure. We explicitly estimate the convexity in each firm's tax function but no evidence of hedging to reduce expected tax liabilities.