Why Isn’t Business Investment More Sensitive to Interest Rates? Evidence from Surveys

Steven Sharpe and Gustavo A. Suarez ()
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Gustavo A. Suarez: Federal Reserve Board, Washington, District of Columbia 20551

Management Science, 2021, vol. 67, issue 2, 720-741

Abstract: Using recent chief financial officer surveys, we examine the sensitivity of investment plans to interest rate expectations and find that, for most firms, investment is extremely insensitive to interest rate decreases and only modestly more responsive to increases. Firms cite ample cash holdings as the most frequent reason to explain their lack of sensitivity. This result is consistent with dynamic models of corporate behavior in which firms build cash buffers in anticipation of potential changes in external financing conditions. In the cross section, we find that the investment plans tend to be the least sensitive to interest rate changes at firms that do not expect to borrow over the coming year and firms facing less-binding financing constraints. This paper was accepted by Tomasz Piskorski, finance.

Keywords: investment; interest rates; hurdle rates; cost of capital; financing constraints (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:67:y:2021:i:2:p:720-741

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