Microsoft Word 2007 ichrie conference Proceedings Final-Final 06-06-07. doc

Control Variables
Firms also face exposure from the interest rate sensitivity of their debt, a fact disclosed by many sample 
lodging firms in their policy statements. An increase in interest rate will increase the interest expense on a firm’s 
floating debt which can affect earnings and the ability to service debt payments. I measure exposure from debt by 
the ratio of floating rate debt to total long-term debt prior to the effect of derivatives to alter this exposure. The 
desire to manage interest rate risk, if any, through debt financing or through the use of derivatives also depends in a 
large part on the firm’s incentives to hedge the exposure. I include control variables that affect hedging and 
exposure. The book-to-market ratio (book value of equity/market value of equity) is used to proxy for 
underinvestment costs based on the assumption that firms with higher growth opportunities (lower book-to-market 
ratios) have greater incentives to hedge the exposure so they have sufficient internal cash to make value enhancing 
investments (Guay, 1998; Froot et al., 1993). Financial distress cost is measured using an interest coverage ratio 
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Absolutes are used because the interest rate exposure will be either negative or positive. Using absolute values permit an 
aggregation and comparison across time periods (Guay, 1998) 

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