Discussion of “Hedge commitments and agency costs of debt: evidence from interest rate protection covenants and accounting conservatism”

Review of Accounting Studies · 2012 · Volume 17 · Issue 3

Abstract

Beatty, Petacchi, and Zhang investigate the role of two hedge commitment mechanisms—interest rate protection covenants and accounting conservatism—in reducing agency costs of debt. Using a large sample of syndicated loan agreements, they provide evidence that borrowers required to hedge interest rate risk through interest rate protection covenants receive lower interest rate charges. However, borrowers who voluntarily hedge interest rate risks receive lower rates only if they implement conservative financial reporting. The authors conclude that the benefits of hedging are realized only when borrowers can credibly commit to maintain hedge positions once a syndicated loan is issued. While the evidence provided by the authors is novel and interesting, I argue that the empirical assessment of hedge benefits is more complex. In addition, there are still some important open issues left unanswered that could be tackled by future research.

Keywords

Covenants, Hedging, Interest rate risk, Syndicated loans

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