How relevant is capital structure for aggregate investment? a regime-switching approach

Banu Simmons-Süer

International Review of Economics & Finance, 2018, vol. 53, issue C, 109-117

Abstract: This paper attempts to show how the cost of capital influences the non-linear interaction between investment and Tobin's q by affecting the probability of regime-switches. Treating the US non-farm, non-financial corporate sector as a representative firm and calculating a cost of capital by weighting the respective costs of equity and debt financing, our estimation results shed light on the periods of low capital expenditure, which are picked up neither by Tobin's q nor by the real interest rate. The findings challenge the concept of the ‘irrelevance of dividends/capital structure’.

Keywords: Investment; Tobin's q; WACC; Regime-switching (search for similar items in EconPapers)
JEL-codes: C1 E4 G3 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:53:y:2018:i:c:p:109-117

DOI: 10.1016/j.iref.2017.10.002

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