Federal Deposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2005-13
Why are Firms Using Interest Rate Swaps to Time the Yield Curve?
State-
Sergey Chernenko
Michael Faulkender
Todd Milbourn
June 20 October 10, 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2005-13
Why are Firms Using Interest Rate Swaps to Time the Yield Curve?
State-
Sergey Chernenko
Michael Faulkender
Todd Milbourn
June 20 October 10, 2005
First Draft: April 29, 2005
This Draft: October 10, 2005
Why are Firms Using Interest Rate Swaps to Time the
Yield Curve?*
Sergey Chernenko
PhD Student, Harvard University
Michael Faulkender
Assistant Professor of Finance, John M. Olin School of Business,
Washington University in St. Louis
Todd Milbourn
Associate Professor of Finance, John M. Olin School of Business,
Washington University in St. Louis
ABSTRACT:
In this paper, we explore the managerial decision-making process with a
particular eye on why managers are timing the interest rate market. We ask whether the
documented sensitivity of interest rate swap usage to the term structure is a function of
managers trying to meet earnings forecasts, attempting to boost near-term results prior to
raising external capital, or simply to increase their compensation? Using a very large,
hand-collected dataset of swap activity, our em pirical findings suggest that the choice of
interest rate exposure is primarily driven by a concern to meet consensus earnings
forecasts and raise managerial pay.
JEL Codes: G32
Key Words: Interest Rate Swaps, Market Timing, Myopia, Speculation
CFR Research Program: Corporate Finance
* This paper is primarily funded by a grant from the FDIC Center for Financial Research; we thank them
for their gracious financial support. The authors wish to thank Doug Diamond, Mark Flannery, Kenneth
French, Gerald Garvey, Bill Marshall, Bernadette Minton, Mitchell Petersen, Josh Rauh, Chandra
Seethamraju, Steven Sharpe, Jeremy Stein, Anjan Thakor, Peter Tufano, Ivo Welch and seminar
participants at the FDIC, the NBER Summer Corporate Finance Workshop, University of Virginia Darden
and Washington University in St. Louis for their helpful comments. We thank Joe Kawamura and Qiwu
Zhou for valuable research assistance.
This Draft: October 10, 2005
Why are Firms Using Interest Rate Swaps to Time the
Yield Curve?*
Sergey Chernenko
PhD Student, Harvard University
Michael Faulkender
Assistant Professor of Finance, John M. Olin School of Business,
Washington University in St. Louis
Todd Milbourn
Associate Professor of Finance, John M. Olin School of Business,
Washington University in St. Louis
ABSTRACT:
In this paper, we explore the managerial decision-making process with a
particular eye on why managers are timing the interest rate market. We ask whether the
documented sensitivity of interest rate swap usage to the term structure is a function of
managers trying to meet earnings forecasts, attempting to boost near-term results prior to
raising external capital, or simply to increase their compensation? Using a very large,
hand-collected dataset of swap activity, our em pirical findings suggest that the choice of
interest rate exposure is primarily driven by a concern to meet consensus earnings
forecasts and raise managerial pay.
JEL Codes: G32
Key Words: Interest Rate Swaps, Market Timing, Myopia, Speculation
CFR Research Program: Corporate Finance
* This paper is primarily funded by a grant from the FDIC Center for Financial Research; we thank them
for their gracious financial support. The authors wish to thank Doug Diamond, Mark Flannery, Kenneth
French, Gerald Garvey, Bill Marshall, Bernadette Minton, Mitchell Petersen, Josh Rauh, Chandra
Seethamraju, Steven Sharpe, Jeremy Stein, Anjan Thakor, Peter Tufano, Ivo Welch and seminar
participants at the FDIC, the NBER Summer Corporate Finance Workshop, University of Virginia Darden
and Washington University in St. Louis for their helpful comments. We thank Joe Kawamura and Qiwu
Zhou for valuable research assistance.