Abstract In this paper we examine the effect of interest rate swaps on the firm, and identify characteristics of firms that use interest rate swaps, reporting findings consistent with interest rate swaps being used as a risk-reducing instrument. Relative to nonswappers, firms using swaps are more likely to experience decreased cash flow variance in the five-year period subsequent to swap initiation. In addition, firms that engage in swaps are found to be larger and more highly levered than a control sample of nonswappers. Dividing our sample based upon type of swap, we find different characteristics explain different types of swap. In particular we find evidence consistent with swaps from variable to fixed interest rates being engaged in for risk reduction, i.e., hedging purposes.