Empirical analysis in this study examines factors that explain the use of interest rate swaps by nonfinancial firms in the Standard & Poor's 500. Consistent with asymmetric information and agency cost theories, firms with significant expected financial distress costs use swaps to transform short-term debt into long-term fixed-rate debt. Debt maturity structure, but not interest rate sensitivity, is significant in the decision to use a swap. Credit quality differentials or expectations of improving financial prospects are not significant in distinguishing among swap users.
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