The management of interest rate risk: evidence from UK companies

The management of interest rate risk: evidence from UK companies Purpose – This paper aims to examine the interest rate risk management (IRRM) practices of UK‐listed companies. In particular, it examines the significance of interest rate risk (IRR) to these companies as well as the risk management practices adopted, including: the methods used to assess the level of IRR and the types of interest rate forecasts used in the process; derivatives activity; and corporate governance, reporting and control. Design/methodology/approach – A series of semi‐structured interviews was conducted with the treasurers of ten UK companies in order to provide an in‐depth analysis of IRRM. Findings – The results of this research suggest that IRR is important to UK companies and that their IRR hedging strategies are geared towards managing shareholder considerations and protecting banking covenants and corporate credit ratings. Moreover, companies rely extensively on financial derivatives to manage their IRR although their corporate governance practices relating to derivatives usage, in some instances, are lacking. Finally, there was a mixed response in relation to the implications of International Accounting Standard (IAS) 39; while some companies fear that the new standard may curb managerial practices, others are in favour of the more stringent reporting requirements. Research limitations/implications – The research indicates that IRRM is important to UK companies, and especially so for firms that have loan covenants in place. Thus, the interest rate decisions of the Bank of England will have a major effect on UK industry. The study also suggests that the implementation of IAS 39 may have unanticipated consequences on the risk management behaviour of UK firms as the possible reduction in the use of options and exchange‐traded products may result in less efficient IRRM within companies. Finally, the research suggests that corporate governance practices relating to financial risk management need to be improved. Originality/value – The use of an interview‐based approach facilitates an investigation of the IRRM practices of companies on an individual basis rather than the aggregated analysis offered by most studies in the area. In addition, the paper addresses the more qualitative aspects of IRRM, such as the form and significance of IRR, IRR policy and strategy, and the use of derivative instruments. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Applied Accounting Research Emerald Publishing

The management of interest rate risk: evidence from UK companies

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
0967-5426
DOI
10.1108/09675420810886123
Publisher site
See Article on Publisher Site

Abstract

Purpose – This paper aims to examine the interest rate risk management (IRRM) practices of UK‐listed companies. In particular, it examines the significance of interest rate risk (IRR) to these companies as well as the risk management practices adopted, including: the methods used to assess the level of IRR and the types of interest rate forecasts used in the process; derivatives activity; and corporate governance, reporting and control. Design/methodology/approach – A series of semi‐structured interviews was conducted with the treasurers of ten UK companies in order to provide an in‐depth analysis of IRRM. Findings – The results of this research suggest that IRR is important to UK companies and that their IRR hedging strategies are geared towards managing shareholder considerations and protecting banking covenants and corporate credit ratings. Moreover, companies rely extensively on financial derivatives to manage their IRR although their corporate governance practices relating to derivatives usage, in some instances, are lacking. Finally, there was a mixed response in relation to the implications of International Accounting Standard (IAS) 39; while some companies fear that the new standard may curb managerial practices, others are in favour of the more stringent reporting requirements. Research limitations/implications – The research indicates that IRRM is important to UK companies, and especially so for firms that have loan covenants in place. Thus, the interest rate decisions of the Bank of England will have a major effect on UK industry. The study also suggests that the implementation of IAS 39 may have unanticipated consequences on the risk management behaviour of UK firms as the possible reduction in the use of options and exchange‐traded products may result in less efficient IRRM within companies. Finally, the research suggests that corporate governance practices relating to financial risk management need to be improved. Originality/value – The use of an interview‐based approach facilitates an investigation of the IRRM practices of companies on an individual basis rather than the aggregated analysis offered by most studies in the area. In addition, the paper addresses the more qualitative aspects of IRRM, such as the form and significance of IRR, IRR policy and strategy, and the use of derivative instruments.

Journal

Journal of Applied Accounting ResearchEmerald Publishing

Published: Jun 9, 2008

Keywords: Interest rates; Risk management; United Kingdom

References

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