Investment and the cost of capital
Subtitle: new evidence from the corporate bond market
By: Simon Gilchrist, Egon Zakrajsek.
Contributors: Zakrajšek, Egon.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13174.; Working paper series (National Bureau of Economic Research) -- working paper no. 13174.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 40
Subjects: Interest rates; Investments -- Econometric models
Description: "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."--abstract.
Notes: "June 2007"

Includes bibliographical references (p. 33-35).

Also available in PDF from the NBER World Wide Web site (www.nber.org).