This paper examines whether corporate hedging is influenced by tax incentives, specifically tax function convexity and the ability to increase debt capacity. The authors find no evidence that firms hedge in response to tax function convexity, as measured by the Graham and Smith (1999) approach. However, they find that firms hedge to increase debt capacity, with increased tax benefits averaging 1.1 percent of firm value. The study also indicates that firms hedge due to expected financial distress costs and firm size. The paper explores the relationship between corporate hedging and capital structure decisions, showing that hedging influences debt ratios. It also examines non-tax incentives for hedging, including expected financial distress costs, underinvestment costs, managerial risk aversion, and informational asymmetries. The authors use a refined dependent variable to measure net hedging and examine a number of non-tax incentives. The study uses financial data from 1994 to 1995, focusing on firms that face ex ante interest rate or foreign exchange risk. It defines ex ante risk exposure based on firms' financial statements and uses a variety of measures to assess derivative holdings. The authors find that firms with higher debt ratios hedge more, and that hedging can increase debt capacity and firm value through tax deductions. The paper also finds that large firms facing high expected distress costs hedge more with derivatives. It uses measures of managerial motives, including delta and vega, to examine the relationship between corporate hedging and managerial incentives. The study concludes that hedging decisions are influenced by a variety of factors, including tax incentives, financial distress costs, and managerial risk aversion. The results have important implications for capital structure research, as they show that hedging decisions are intertwined with other corporate decisions.This paper examines whether corporate hedging is influenced by tax incentives, specifically tax function convexity and the ability to increase debt capacity. The authors find no evidence that firms hedge in response to tax function convexity, as measured by the Graham and Smith (1999) approach. However, they find that firms hedge to increase debt capacity, with increased tax benefits averaging 1.1 percent of firm value. The study also indicates that firms hedge due to expected financial distress costs and firm size. The paper explores the relationship between corporate hedging and capital structure decisions, showing that hedging influences debt ratios. It also examines non-tax incentives for hedging, including expected financial distress costs, underinvestment costs, managerial risk aversion, and informational asymmetries. The authors use a refined dependent variable to measure net hedging and examine a number of non-tax incentives. The study uses financial data from 1994 to 1995, focusing on firms that face ex ante interest rate or foreign exchange risk. It defines ex ante risk exposure based on firms' financial statements and uses a variety of measures to assess derivative holdings. The authors find that firms with higher debt ratios hedge more, and that hedging can increase debt capacity and firm value through tax deductions. The paper also finds that large firms facing high expected distress costs hedge more with derivatives. It uses measures of managerial motives, including delta and vega, to examine the relationship between corporate hedging and managerial incentives. The study concludes that hedging decisions are influenced by a variety of factors, including tax incentives, financial distress costs, and managerial risk aversion. The results have important implications for capital structure research, as they show that hedging decisions are intertwined with other corporate decisions.