Interest rate risk of non-financial firms: who hedges and does it help?

Key takeaways

• Natural language text analysis of 80,000 company financial statements published by 14,000 non-financial firms in the euro area, United Kingdom and United States shows that around 50% of firms with variable rate debt hedge their interest rate risk.
• Firms that hedge interest rate risk tend to be larger and have smaller cash buffers and lower equity valuations.
• When interest rates rise, firms that hedge their interest rate risk experience a smaller negative impact on their interest coverage ratios and market valuations. They are also better able to maintain the size of their workforce.
• Our analysis highlights the importance of, and the challenges in, getting a comprehensive overview of hedging activity among non-financial firms.