Working Paper: NBER ID: w13174
Authors: Simon Gilchrist; Egon Zakrajsek
Abstract: We study the effect of variation in interest rates on investment spending, employing a large panel data set that links yields on outstanding corporate bonds to the issuer income and balance sheet statements. The bond price data -- based on trades in the secondary market -- enable us to construct a firm-specific measure of the user cost of capital based on the marginal cost of external finance as determined in the market for long-term corporate debt. Our results imply a robust and quantitatively important effect of the user cost of capital on the firm-level investment decisions. According to our estimates, a 1 percentage point increase in the user cost of capital implies a reduction in the investment rate of 50 to 75 basis points and, in the long run, a 1 percent reduction in the stock of capital.
Keywords: Investment; Cost of Capital; Corporate Bonds
JEL Codes: E22; E44; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Interest rates (E43) | User cost of capital (G31) |
| User cost of capital (G31) | Investment decisions (G11) |
| Interest rates (E43) | Investment decisions (G11) |