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.
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