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Journal of Finance Vol. 57 No. 2 2002

Do Firms Hedge in Response to Tax Incentives?

John R. Graham1,2,3,4,5; Daniel A. Rogers1,2,3,4,5,6

1 Oklahoma State University · 2 Northeastern University · 3 California State University, Northridge · 4 Fordham University · 5 Southern Methodist University · 6 Rogers (United States)

Abstract

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.

DOI
10.1111/1540-6261.00443
Volume
57
Issue
2
Pages
815-839
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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