The Management of Interest Rate Risk: Evidence from UK Companies

Alpa Dhanani, Suzanne Fifield, Christine Helliar, Lorna Stevenson

    Research output: Contribution to journalArticle

    3 Citations (Scopus)

    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.
    Original languageEnglish
    Pages (from-to)52-70
    Number of pages19
    JournalJournal of Applied Accounting Research
    Volume9
    Issue number1
    DOIs
    Publication statusPublished - 2008

    Fingerprint

    Interest rate risk
    Risk management
    Corporate governance
    Derivatives
    Management practices
    Interest rates
    Covenant
    International accounting standards
    Financial derivatives
    Credit rating
    Managerial practices
    Design methodology
    Listed companies
    Banking
    Loans
    Financial risk management
    Structured interview
    Industry
    Shareholders
    Bank of England

    Cite this

    Dhanani, Alpa ; Fifield, Suzanne ; Helliar, Christine ; Stevenson, Lorna. / The Management of Interest Rate Risk: Evidence from UK Companies. In: Journal of Applied Accounting Research. 2008 ; Vol. 9, No. 1. pp. 52-70.
    @article{33ca74fbfea04da79cd5cb6b6528a63b,
    title = "The Management of Interest Rate Risk:: Evidence from UK Companies",
    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.",
    author = "Alpa Dhanani and Suzanne Fifield and Christine Helliar and Lorna Stevenson",
    note = "The authors would like to thank CIMA for their financial support for this project.",
    year = "2008",
    doi = "10.1108/09675420810886123",
    language = "English",
    volume = "9",
    pages = "52--70",
    journal = "Journal of Applied Accounting Research",
    issn = "0967-5426",
    publisher = "Emerald",
    number = "1",

    }

    The Management of Interest Rate Risk: Evidence from UK Companies. / Dhanani, Alpa; Fifield, Suzanne; Helliar, Christine; Stevenson, Lorna.

    In: Journal of Applied Accounting Research, Vol. 9, No. 1, 2008, p. 52-70.

    Research output: Contribution to journalArticle

    TY - JOUR

    T1 - The Management of Interest Rate Risk:

    T2 - Evidence from UK Companies

    AU - Dhanani, Alpa

    AU - Fifield, Suzanne

    AU - Helliar, Christine

    AU - Stevenson, Lorna

    N1 - The authors would like to thank CIMA for their financial support for this project.

    PY - 2008

    Y1 - 2008

    N2 - 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.

    AB - 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.

    U2 - 10.1108/09675420810886123

    DO - 10.1108/09675420810886123

    M3 - Article

    VL - 9

    SP - 52

    EP - 70

    JO - Journal of Applied Accounting Research

    JF - Journal of Applied Accounting Research

    SN - 0967-5426

    IS - 1

    ER -