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hedge commitments (We provide large sample evidence that credible hedge commitments reduce
the agency costs of debt and that accounting conservatism enhances hedge
commitments. We examine 2,338 bank loans entered into by 263 mandatory
derivative users that are contractually obligated by interest rate
protection covenants, 709 voluntary derivative users, and 1,366
non-users. We show that loan contracts are more likely to include
interest rate protection covenants when borrowers are less likely to
maintain the hedge position once the financing is completed. We find
that borrowers who credibly commit to hedge using the covenants
significantly reduce their interest rates. While we do not find an
average interest savings for voluntary derivative users, we do find a
reduction in their loan rates when they practice conservative financial
reporting. Our results suggest that accounting conservatism helps
borrowers resolve shareholder-creditor conflicts by committing to
maintain their hedge positions after completing debt financing. Moonranger) |
