Do firms hedge in response to tax incentives? Evidence from Norway

This study presents two potential tax incentives for firms to hedge. Firstly firms can hedge in response to tax convexity in order to smooth company earnings. Secondly firms can use derivatives to decrease costs of financial distress and increase debt capacity, thus increasing tax shields of the firm. I empirically test whether Norwegian firms hedge in response to tax incentives arising from tax convexity. A logistic regression is used to compare hedging and no hedging Norwegian nonfinancial firms for the year of 2012 in relation to proxies for tax convexity. The results do not show a significant relationship between proxies for tax convexity and contradicts the theoretical basis for the main hypothesis. The results do not show proof of tax incentives to hedge through tax preference items, such as tax loss carryforwards. Hedging seems to be related to agency cost, profitability leverage and to a certain degree; firm size measured by total assets.