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Investment and the Cost of Capital: New Evidence from the Corporate Bond Market

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Author Info
Simon Gilchrist (Department of Economics, Boston University and NBER)
Fabio M. Natalucci (Federal Reserve Board)
Egon Zakrajsek () (Federal Reserve Board)

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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 rate of investment of 50 basis points and, in the long-run, a 1 percent reduction in the stock of capital.

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Publisher Info
Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2007-027.

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Length: 32pages
Date of creation: Apr 2007
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Handle: RePEc:bos:wpaper:wp2007-027

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Related research
Keywords: Investment; user cost of capital; corporate bond yields;

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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. François Gourio, 2009. "Disasters Risk and Business Cycles," NBER Working Papers 15399, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Tuomas A. Peltonen & Ricardo M. Sousa & Isabel S. Vansteenkiste, 2009. "Asset prices, Credit and Investment in Emerging Markets," NIPE Working Papers 18/2009, NIPE - Universidade do Minho. [Downloadable!]
  3. Tuomas A. Peltonen & Ricardo M. Sousa & Isabel S. Vansteenkiste, 2009. "Fundamentals, Financial Factors and The Dynamics of Investment in Emerging Markets," NIPE Working Papers 19/2009, NIPE - Universidade do Minho. [Downloadable!]
  4. Tatom, John, 2007. "Is Tax Policy Retarding Growth in Morocco?," MPRA Paper 6011, University Library of Munich, Germany. [Downloadable!]
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