Hedging Interest Rate Risk: Evidence from U.S. Nonfinancial Firms
Abstract: This paper shows that interest rate hedging is concentrated among highly leveraged, high cash flow firms, and that for these firms, hedging protects investment when rates increase. Using a large language model, I extract interest rate hedging data from SEC filings for 8,792 U.S. public nonfinancial firms from 2014 to 2024. Hedging is rare and persistent, and leverage and operating cash flow jointly predict hedging. Using an event study around the 2022-2023 hiking cycle, I show that hedging protects firm investment from rate increases. A heterogeneous firm model explains these patterns. Debt raises default risk and therefore the value of hedging, but hedging is costly, and this cost is the main barrier to participation. In the model, hedging offsets 67% of the aggregate investment decline after a 100 basis point rate increase, while only modestly dampening the investment response to rate cuts. These results suggest that the effects of rate changes may fall disproportionately on unhedged firms.