Ž . Journal of Corporate Finance 5 1999 55–78 The interest rate swap: Theory and evidence Kent T. Saunders ) Le Moyne College, 1419 Salt Springs Road, Syracuse, NY 13214-1399, USA Received 1 March 1996; accepted 1 March 1998 Abstract Nonfinancial firms that use interest rate swaps are compared with nonusers for the years 1991, 1993, and 1995. Swap use grew from 6% of all firms in 1991 to 8% in 1995. Nonfinancial firms use fixed rate payer swaps more often than floating rate payer swaps. Firms that use swaps are significantly larger and have a higher debt to equity ratio relative to nonusers. Fixed rate payers receive a ratings’ upgrade significantly more often than floating rate payers and experience a significantly higher percentage increase in net sales in the year of swap initiation relative to floating rate payers and the industry average. Floating rate payers have a significantly higher S & P bond rating relative to the industry average. w The test results lend support to the information asymmetry theory of swap usage Titman, S., 1992. Interest rate swaps and corporate financing choices, Journal of Finance 47, pp. x 1503–1516 and lend some support to the asset substitution portion of the agency cost w theory of swap usage Wall, L.D., 1989. Interest rate swaps in an agency theoretic model x with uncertain interest rates. Journal of Banking and Finance 13, pp. 261–270 . q 1999 Elsevier Science B.V. All rights reserved. JEL classification: G30 Keywords: Interest rate swap; Interest rate exchange agreement; Hedging; Financial derivative ) Ž . Ž . Tel.: q1 315 445-4488; fax: q1 315 445-4540; e-mail: saundekt@maple.lemoyne.edu 0929-1199r99r$ - see front matter q 1999 Elsevier Science B.V. All rights reserved. Ž . PII: S0929-1199 98 00017-0