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

Measure of Derivatives 
Prior research has measured derivatives using a dummy variable and as a continuous variable (Guay, 1998; 
Hentschel & Kothari, 2001). Following prior research, I use the level of hedging as an explanatory variable and 
define it as the aggregate notional value of all reported non-trading interest rate derivatives that qualify for hedge 
accounting treatment outstanding at the end of the fiscal year, and scaled by the book value of assets. Unlike prior 
research, I exclude derivatives that are speculative or those that fail to qualify for hedge accounting treatment, 
including any foreign currency derivatives. In addition, I also use a dummy variable that is equal to one if the firm 
is a derivative user and zero otherwise.