Year: 2007
Type: report
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.
DOI: 10.3386/w13174
Authors: Simon Gilchrist, Egon Zakrajsek
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1836722941