Frictions and Tax-Motivated Hedging: An Empirical Exploration of Publicly-Traded Exchangeable Securities

William Gentry, David M. Schizer

NBER Working Paper No. 9243
Issued in September 2002
NBER Program(s):Asset Pricing, Public Economics

As financial engineering becomes more sophisticated, taxing income from capital becomes increasingly difficult. A crucial issue for tax policymakers, then, is the ease or difficulty of implementing tax-advantaged transactions We offer the first empirical study of a high profile strategy known as tax-free hedging,' which offers economic benefits of a sale without triggering tax. We explore one method of hedging, in which the taxpayer issues publicly-traded exchangeable securities, known by acronyms such as DECS and PHONES. We focus on such offerings between 1992 and 2001, identifying 61 transactions that account for $24 billion in proceeds. Using these publicly-available data, we offer empirical evidence about various frictions that might discourage taxpayers from hedging with exchangeable securities. In so doing, we shed light on why taxpayers might prefer to hedge through private over-the-counter' transactions with derivatives dealers. The main reason is that an offering of exchangeable securities is announced in advance and implemented all at once, triggering an almost four percent decline in the underlying stock price before the hedge is implemented.

download in pdf format
   (286 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w9243

Published: Gentry, William M. and David M. Schizer. "Frictions And Tax-Motivated Hedging: An Empirical Exploration Of Publicly-Traded Exchangeable Securities," National Tax Journal, 2003, v56(1,Supp), 167-195.

Users who downloaded this paper also downloaded* these:
Fazzari, Hubbard, and Petersen w2387 Financing Constraints and Corporate Investment
Blau and Kahn w17275 Substitution Between Individual and Cultural Capital: Pre-Migration Labor Supply, Culture and US Labor Market Outcomes Among Immigrant Women
Bailey w19493 Fifty Years of Family Planning: New Evidence on the Long-Run Effects of Increasing Access to Contraception
Friedman, Johnson, and Mitton w9949 Propping and Tunneling
Fukao and Ito Foreign Direct Investment and Services Trade: The Case of Japan
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us