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Investment and the WACC: new micro evidence for France

Juan Carluccio, Clément Mazet-Sonilhac and Jean-Stéphane Mésonnier ()

Working papers from Banque de France

Abstract: We exploit a new dataset of consolidated balance sheets for some 1,850, mostly nonlisted, French corporate groups, in order to investigate the relationship between corporate investment and the cost of capital. Our empirical model is motivated by a standard Q-theory of investment and relates the rate of investment to a proxy for profits, the cost of capital and firm- and sector-level controls. We notably construct firm-level measures of the weighted average cost of capital (WACC) that account for industry-specific values of the cost of equity and reflect the actual capital structure of firms. We find a confirmation that a high WACC drags down investment: a one SD increase in the real WACC (+2 pp) is associated on average with a reduction by 0.65 pp in the investment rate. The effect is somewhat larger for manufacturing firms and when firms are highly leveraged or more dependent on external finance. We also investigate the impact of lower competition or higher uncertainty on business investment and do not find evidence in support of any role of these two factors in France in recent years.

Keywords: Business Investment; Cost of Capital; Uncertainty; Competition (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-bec, nep-cfn, nep-eur and nep-sbm
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:710

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