IDEAS home Printed from https://ideas.repec.org/p/boe/boeewp/023284.html

Sticky hurdles: the dynamics of firm hurdle rates in a tightening cycle

Author

Listed:
  • Krishan Shah

    (Bank of England)

  • Philip Bunn

    (Bank of England)

  • Marko Melolinna

    (Financial Conduct Authority)

Abstract

Many firms use required rates of return on investment – or hurdle rates – to evaluate the attractiveness of their investment projects. This paper examines the adjustment of these hurdle rates to a tightening in monetary policy. Using new survey evidence from the 2022–23 hiking cycle, we find that hurdle rates for UK firms tend to be high and that they responded sluggishly to increases in interest rates over this period. Firms who use external finance to fund investment were more likely to have adjusted their hurdle rates in response to higher interest rates; but even for these firms, only around half of the increase in cost of capital was passed into hurdle rates. Using high-frequency monetary policy shocks over a longer period of time, we show that firms with sticky hurdle rates reduce investment by less in response to contractionary policy shocks than firms that update their hurdle rates more frequently.

Suggested Citation

  • Krishan Shah & Philip Bunn & Marko Melolinna, 2025. "Sticky hurdles: the dynamics of firm hurdle rates in a tightening cycle," Bank of England Staff Working Paper series 1162, Bank of England.
  • Handle: RePEc:boe:boeewp:023284
    as

    Download full text from publisher

    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2025/sticky-hurdles-the-dynamics-of-firm-hurdle-rates-in-a-tightening-cycle.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Silvana Tenreyro & Gregory Thwaites, 2016. "Pushing on a String: US Monetary Policy Is Less Powerful in Recessions," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 43-74, October.
    2. Masao Fukui & Niels Joachim Gormsen & Kilian Huber, 2024. "Sticky Discount Rates," NBER Working Papers 32238, National Bureau of Economic Research, Inc.
    3. Jumana Saleheen & Iren Levina & Marko Melolinna & Srdan Tatomir, 2017. "The financial system and productive investment: new survey evidence," Bank of England Quarterly Bulletin, Bank of England, vol. 57(1), pages 4-17.
    4. Gourio, Francois & Kashyap, Anil K, 2007. "Investment spikes: New facts and a general equilibrium exploration," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 1-22, September.
    5. John R. Graham, 2022. "Presidential Address: Corporate Finance and Reality," Journal of Finance, American Finance Association, vol. 77(4), pages 1975-2049, August.
    6. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    7. Lea Best & Benjamin Born & Manuel Menkhoff, 2025. "The Impact of Interest: Firms' Investment Sensitivity to Interest Rates," CESifo Working Paper Series 12167, CESifo.
    8. Jagannathan, Ravi & Matsa, David A. & Meier, Iwan & Tarhan, Vefa, 2016. "Why do firms use high discount rates?," Journal of Financial Economics, Elsevier, vol. 120(3), pages 445-463.
    9. James Cloyne & Clodomiro Ferreira & Maren Froemel & Paolo Surico, 2023. "Monetary Policy, Corporate Finance, and Investment," Journal of the European Economic Association, European Economic Association, vol. 21(6), pages 2586-2634.
    10. Braun, Robin & Miranda-Agrippino, Silvia & Saha, Tuli, 2025. "Measuring monetary policy in the UK: The UK monetary policy event-study database," Journal of Monetary Economics, Elsevier, vol. 149(C).
    11. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    12. John Graham, 2022. "Presidential Address: Corporate Finance and Reality," NBER Working Papers 29841, National Bureau of Economic Research, Inc.
    13. Joshua D. Angrist & Òscar Jordà & Guido M. Kuersteiner, 2018. "Semiparametric Estimates of Monetary Policy Effects: String Theory Revisited," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 36(3), pages 371-387, July.
    14. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 169-215.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wei‐Shao Wu & Sandy Suardi, 2025. "Heterogeneity in the effects of bank lines of credit on capital investment efficiency," The Financial Review, Eastern Finance Association, vol. 60(2), pages 601-621, May.
    2. Kolev, Atanas & Randall, Timothy, 2024. "The effect of uncertainty on investment: Evidence from EU survey data," EIB Working Papers 2024/02, European Investment Bank (EIB).
    3. Barry, John W. & Carlin, Bruce I. & Crane, Alan D. & Graham, John R., 2026. "Hurdle rate buffers and bargaining power in asset acquisition," Journal of Financial Economics, Elsevier, vol. 178(C).
    4. Battalio, Robert & Loughran, Tim & McDonald, Bill, 2026. "How managers frame capital budgeting in investor communications," Journal of Corporate Finance, Elsevier, vol. 100(C).
    5. Hasan, Iftekhar & Politsidis, Panagiotis N. & Sharma, Zenu, 2021. "Global syndicated lending during the COVID-19 pandemic," Journal of Banking & Finance, Elsevier, vol. 133(C).
    6. Lingwen, Kong & Hanye, Gu & Runxiang, Xu & Yang, Zhiguo, 2025. "Firm-level perception of uncertainty and corporate default risk: Evidence from China’s listed firms," Economic Analysis and Policy, Elsevier, vol. 88(C), pages 1082-1096.
    7. Benkraiem, Ramzi & Gaaya, Safa & Lakhal, Faten & Kilic, Merve, 2025. "Access to finance and corporate tax avoidance: International evidence," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 58(C).
    8. Hu, Lifang, 2025. "Maturity mismatch and disinvestment as transmission mechanisms: Linking economic policy uncertainty to firm performance," China Economic Review, Elsevier, vol. 94(PB).
    9. Masao Fukui & Niels Joachim Gormsen & Kilian Huber, 2024. "Sticky Discount Rates," NBER Working Papers 32238, National Bureau of Economic Research, Inc.
    10. Emanuel Kohlscheen & Aaron Mehrotra & Dubravko Mihaljek, 2020. "Residential Investment and Economic Activity: Evidence from the Past Five Decades," International Journal of Central Banking, International Journal of Central Banking, vol. 16(6), pages 287-329, December.
    11. Edwards, Geoff, 2026. "Risk, Frictions, and Liquidity: An Integrated Literature Survey on Geopolitical and Climate Risk and Market Design," MPRA Paper 128690, University Library of Munich, Germany.
    12. Michelle Lowry, 2024. "The questions being asked: Academic research, the media, and regulators," The Financial Review, Eastern Finance Association, vol. 59(3), pages 549-560, August.
    13. Nitin Nair, 2026. "The Effect of Corporate Cash Accumulation on Monetary Policy Transmission: A Stock-flow Consistent Growth Model," Working Papers PKWP2610, Post Keynesian Economics Society (PKES).
    14. De Vito, Antonio & Hillmann, Lisa & Jacob, Martin & Vossebürger, Robert, 2025. "Do personal income taxes affect corporate tax-motivated profit shifting?," Journal of Accounting and Economics, Elsevier, vol. 79(2).
    15. Lu, Jiajun & Lv, Linying & Wang, Yizhong & Zhu, Yueteng, 2025. "The real effect of monetary policy under uncertainty: Evidence from the change in corporate financing purposes," Journal of Banking & Finance, Elsevier, vol. 172(C).
    16. Roy, Suvra & Marshall, Ben R. & Nguyen, Hung T. & Visaltanachoti, Nuttawat, 2025. "Stock price crashes and systematic risk," Journal of Contemporary Accounting and Economics, Elsevier, vol. 21(3).
    17. Vivien Lefebvre, 2023. "Turning 30 and myopic? Temporal orientation and the firm lifecycle," Post-Print hal-04563638, HAL.
    18. Hauzenberger, Niko & Pfarrhofer, Michael & Stelzer, Anna, 2021. "On the effectiveness of the European Central Bank’s conventional and unconventional policies under uncertainty," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 822-845.
    19. Richard Disney & Helen Miller & Thomas Pope, 2018. "Firm-level investment spikes and aggregate investment over the Great Recession," IFS Working Papers W18/03, Institute for Fiscal Studies.
    20. Si, Yi & Yu, Minfeng & Zhang, Lei & Zhou, Qing (Clara), 2025. "Board reforms and firm employment: Worldwide evidence," Journal of Banking & Finance, Elsevier, vol. 171(C).

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:023284. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Research (email available below). General contact details of provider: https://edirc.repec.org/data/boegvuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.