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

Simon Gilchrist and Egon Zakrajšek ()

No 13174, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E22 E44 E62 (search for similar items in EconPapers)
Date: 2007-06
New Economics Papers: this item is included in nep-mac
Note: EFG ME
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Citations: View citations in EconPapers (72)

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Working Paper: Investment and the Cost of Capital: New Evidence from the Corporate Bond Market (2007)
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