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Interest Rate Swaps and Corporate Financing Choices - TITMAN - 1992 - The Journal of Finance - Wiley Online Library
Source: onlinelibrary.wiley.com
Article summary:
1. The article examines the use of interest rate swaps as a way for firms to reduce their borrowing costs and manage their debt.
2. The paper builds on an idea developed by Flannery (1986) that in the absence of interest rate uncertainty, borrowers with private information prefer short-term loans.
3. The model developed in this paper allows for both interest rate uncertainty and financial distress costs, and expands the financing alternatives to include interest rate swaps.
Article analysis:
The article is written by a reputable author from a well-known journal, which adds to its trustworthiness and reliability. The article provides a detailed explanation of how interest rate swaps work and how they can be used to reduce borrowing costs and manage debt. It also provides evidence from Bicksler and Chen (1986) that supports the argument that firms with lower credit ratings can benefit from using swap transactions to create synthetic fixed-rate obligations with initial spreads over AAA rates that are equal to short-term spreads rather than long-term spreads.
However, there are some potential biases in the article that should be noted. For example, it does not explore any counterarguments or present both sides equally when discussing the use of interest rate swaps. Additionally, it does not provide any evidence for its claims about the benefits of using swap transactions or discuss any possible risks associated with them. Furthermore, it does not consider other factors such as transaction costs or regulations that may affect a firm's decision to use swap transactions.
In conclusion, while this article is generally reliable and trustworthy due to its reputable author and source, there are some potential biases that should be taken into consideration when evaluating its claims about the benefits of using swap transactions.