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

Simon Gilchrist, Fabio Natalucci and Egon Zakrajsek ()
Additional contact information
Fabio Natalucci: Federal Reserve Board
Egon Zakrajsek: Federal Reserve Board
Authors registered in the RePEc Author Service: Laurence Kotlikoff

No WP2007-027, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

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 rate of investment of 50 basis points and, in the long-run, a 1 percent reduction in the stock of capital.

Keywords: Investment; user cost of capital; corporate bond yields (search for similar items in EconPapers)
JEL-codes: E22 E44 E62 (search for similar items in EconPapers)
Pages: 32pages
Date: 2007-04
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (69)

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Working Paper: Investment and the Cost of Capital: New Evidence from the Corporate Bond Market (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:bos:wpaper:wp2007-027

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