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

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  • Simon Gilchrist

    (Department of Economics, Boston University and NBER)

  • Fabio M. Natalucci

    (Federal Reserve Board)

  • Egon Zakrajsek

    ()
    (Federal Reserve Board)

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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Bibliographic 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
Date of revision:
Handle: RePEc:bos:wpaper:wp2007-027

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

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References

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Citations

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Cited by:
  1. 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.
  2. François Gourio, 2009. "Disasters Risk and Business Cycles," NBER Working Papers 15399, National Bureau of Economic Research, Inc.
  3. Richard Fabling & Norman Gemmell & Richard Kneller & Lynda Sanderson, 2013. "Estimating Firm-Level Effective Marginal Tax Rates and the User Cost of Capital in New Zealand," Treasury Working Paper Series 13/29, New Zealand Treasury.
  4. Hashmat Khan & Charlotta Groth, 2007. "Investment Adjustment Costs: An Empirical Assessment," Carleton Economic Papers 07-08, Carleton University, Department of Economics, revised Dec 2010.
  5. 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.
  6. Emilios Avgouleas, 2010. "The Regulation of Short Sales and its Reform," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 8(1), pages 24-27, 04.
  7. Simon Gilchrist & Jae W. Sim & Egon Zakrajsek, 2012. "Misallocation and financial market frictions: some direct evidence from the dispersion in borrowing costs," Finance and Economics Discussion Series 2012-08, Board of Governors of the Federal Reserve System (U.S.).
  8. Gallegati, Marco & Ramsey, James B., 2013. "Bond vs stock market's Q: Testing for stability across frequencies and over time," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 138-150.
  9. Tatom, John, 2007. "Is Tax Policy Retarding Growth in Morocco?," MPRA Paper 6011, University Library of Munich, Germany.
  10. Jennie Bai & Thomas Philippon & Alexi Savov, 2013. "Have Financial Markets Become More Informative?," NBER Working Papers 19728, National Bureau of Economic Research, Inc.
  11. Jennie Bai, 2012. "Have Financial Markets Become More Informative?," 2012 Meeting Papers 1193, Society for Economic Dynamics.
  12. Fabling, Richard & Gemmell, Norman & Kneller, Richard & Sanderson, Lynda, 2013. "Estimating Firm-Level Effective Tax Rates and the User Cost of Capital in New Zealand," Working Paper Series 2854, Victoria University of Wellington, Chair in Public Finance.

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