How and Why Do Small Firms Manage Interest Rate Risk? Evidence from Commercial Loans

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How and Why Do Small Firms Manage Interest Rate Risk? Evidence from Commercial Loans

August 2005 Number 215
Revised September 2006

JEL classification: G21, G30

Author: James Vickery

Although small firms are particularly sensitive to interest rates and other external shocks, empirical work on corporate risk management has focused instead on large public companies. This paper studies fixed-rate and adjustable-rate loans to see how small firms manage their exposure to interest rate risk. Credit-constrained firms are found to match significantly more often with fixed-rate loans, consistent with prior research showing that the supply of internal and external finance shrinks during periods of rising interest rates. Banks originate a higher share of adjustable-rate loans than other lender types, ameliorating maturity mismatch and exposure to the lending channel of monetary policy. Time-series patterns in the share of fixed-rate commercial loans are consistent with recent evidence on “debt market timing.”

Available only in PDF PDF

50 pages / 257 kb

For a published version of this report, see James Vickery, "How and Why Do Small Firms Manage Interest Rate Risk?" Journal of Financial Economcis 87, no. 2 (February 2008): 446-70.

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