The Relation Between Interest Rate Derivatives, Debt Maturity Structure, and Exposure in the Lodging Industry

Abstract

The purpose of this study is to investigate the relation between interest rate derivatives, interest rate exposure, and debt maturity structure in a sample of lodging firms from 2000 to 2004. Lodging firms face greater exposure from their debt liabilities compared with exposure from their operating cash flows. The results show that small unrated firms are more likely to issue short-term debt and swap into fixed-rate debt to reduce exposure to interest rate risk. On the other hand, larger and highly rated firms will swap from fixed debt into floating-rate debt. The results are robust to alternative specifications and also provide support for the agency cost and information asymmetry theoretical arguments for using interest rate derivatives. In addition, the yield spread, interest rate exposure, and debt ratings are determined to be significant factors in explaining interest rate derivative positions.