Working Paper: NBER ID: w19327
Authors: Xioaji Lin; Chong Wang; Neng Wang; Jinqiang Yang
Abstract: We study the impact of stochastic interest rates and capital illiquidity on investment and firm value by incorporating a widely used arbitrage-free term structure model of interest rates into a standard q theoretic framework. Our generalized q model informs us to use corporate credit-risk information to predict investments when empirical measurement issues of Tobin’s average q are significant (e.g., equity is much more likely to be mis-priced than debt), as in Philippon (2009). We find, consistent with our theory, that credit spreads and bond q have significant predictive powers on micro-level and aggregate investments corroborating the recent empirical work of Gilchrist and Zakrajšek (2012). We also show that the quantitative effects of the stochastic interest rates and capital illiquidity on investment, Tobin’s average q, the duration and user cost of capital, and the value of growth opportunities are substantial. These findings are particularly important in today’s low interest rate environment.
Keywords: No keywords provided
JEL Codes: E2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| interest rates (E43) | investment (G31) |
| credit spreads (G12) | investment (G31) |
| bond Q (G12) | investment (G31) |
| stochastic interest rates (E43) | investment (G31) |
| capital illiquidity (E22) | investment (G31) |