Egon Zakrajšek: Investment and the cost of capital: New evidence from the corporate bond market

Date of publication: 29. 11. 2007
Mathematics colloquium
Četrtek, 6. 12. 2007, ob 18.15 v 2.02 na Jadranski 21.

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.